JULY 18, 2002

Mr. GEPHARDT (for himself, Mr. SHOWS, Mr. HOLDEN, Mr. PHELPS, Ms. CARSON of Indiana, Mr. RANGEL, Mr. LAFALCE, Mr. CONYERS, Mr. GEORGE MILLER of California, Mr. MATSUI, Ms. LEE, Mr. DICKS, Mr. WAXMAN, Ms. SLAUGHTER, Mr. CARDIN, Mr. TIERNEY, Mr. LYNCH, Mr. BONIOR, Mr. BARRETT of Wisconsin, and Mr. FRANK) introduced the following bill; which was referred to the Committee on Financial Services, and in addition to the Committees on Ways and Means, the Judiciary, and Education and the Workforce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

A BILL

To promote corporate responsibility.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.

(a) SHORT TITLE- This Act may be cited as the ‘Business, Investors’, and Employees’ Bill of Rights Act of 2002’.

Subtitle G--General Provisions

SEC. 101. CRIMINAL PENALTIES FOR ALTERING DOCUMENTS.

(a) IN GENERAL- Chapter 73 of title 18, United States Code, is amended by adding at the end the following:

‘Sec. 1519. Destruction, alteration, or falsification of records in Federal investigations and bankruptcy

‘Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

‘Sec. 1520. Destruction of corporate audit records

‘(a) Any accountant who conducts an audit of an issuer of securities to which section 10A(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1(a)) applies, shall maintain all documents (including electronic documents) sent, received, or created in connection with any audit, review, or other engagement for such issuer for a period of 20 years from the end of the fiscal period in which the audit, review, or other engagement was concluded.

‘(b) Whoever knowingly and willfully violates subsection (a) shall be fined under this title, imprisoned not more than 5 years, or both.

‘(c) Nothing in this section shall be deemed to diminish or relieve any person of any other duty or obligation, imposed by Federal or State law or regulation, to maintain, or refrain from destroying, any document.’.

(b) CLERICAL AMENDMENT- The table of sections at the beginning of chapter 73 of title 18, United States Code, is amended by adding at the end the following new items:

‘1519. Destruction, alteration, or falsification of records in Federal investigations and bankruptcy.

(a) IN GENERAL- Chapter 63 of title 18, United States Code, is amended by adding at the end the following:

‘Sec. 1348. Securities fraud

‘Whoever knowingly executes, or attempts to execute, a scheme or artifice--

‘(1) to defraud any person in connection with any security registered under section 12 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l, 78o(d)) or section 6 of the Securities Act of 1933 (15 U.S.C. 77f); or

‘(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any security registered under section 12 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l, 78o(d)) or section 6 of the Securities Act of 1933 (15 U.S.C. 77f),

shall be fined under this title, or imprisoned not more than 25 years, or both.’.

(b) CLERICAL AMENDMENT- The table of sections at the beginning of chapter 63 of title 18, United States Code, is amended by adding at the end the following new item:

Pursuant to section 994 of title 28, United States Code, and in accordance with this section, the United States Sentencing Commission shall review and amend, as appropriate, the Federal Sentencing Guidelines and related policy statements to ensure that--

(1) the guideline offense levels and enhancements for an obstruction of justice offense are adequate in cases where documents or other physical evidence are actually destroyed or fabricated;

(2) the guideline offense levels and enhancements for violations of section 1519 or 1520 of title 18, United States Code, as added by this Act, are sufficient to deter and punish that activity;

(3) the guideline offense levels and enhancements under United States Sentencing Guideline 2B1.1 (as in effect on the date of enactment of this Act) are sufficient for a fraud offense when the number of victims adversely involved is significantly greater than 50; and

(4) a specific offense characteristic enhancing sentencing is provided under United States Sentencing Guideline 2B1.1 (as in effect on the date of enactment of this Act) for a fraud offense that endangers the solvency or financial security of 1 or more victims.

(2) in paragraph (18), by striking the period at the end and inserting ‘; or’; and

(3) by adding at the end, the following:

‘(19) that--

‘(A) arises under a claim relating to--

‘(i) the violation of any of the Federal securities laws (as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), any State securities laws, or any regulations or orders issued under such Federal or State securities laws; or

‘(ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and

‘(B) results, in relation to any claim described in subparagraph (A), from--

‘(i) any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding;

‘(ii) any settlement agreement entered into by the debtor; or

‘(iii) any court or administrative order for any damages, fine, penalty, citation, restitutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor.’.

(2) in paragraphs (3) and (4) by striking ‘$4,000’ each place it appears and inserting ‘$10,000’.

SEC. 106. STATUTE OF LIMITATIONS FOR SECURITIES FRAUD.

(a) IN GENERAL- Section 1658 of title 28, United States Code, is amended--

(1) by inserting ‘(a)’ before ‘Except’; and

(2) by adding at the end the following:

‘(b) Notwithstanding subsection (a), a private right of action that involves a claim of fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), may be brought not later than the earlier of--

‘(1) 5 years after the date on which the alleged violation occurred; or

‘(2) 3 years after the date on which the alleged violation was discovered.’.

(b) EFFECTIVE DATE- The limitations period provided by section 1658(b) of title 28, United States Code, as added by this section, shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act.

‘(a) WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES- No company with securities registered under section 6 of the Securities Act of 1933 (15 U.S.C. 77f) or section 12 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l, 78o(d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee--

‘(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by--

‘(A) a Federal regulatory or law enforcement agency;

‘(B) any Member of Congress or any committee of Congress; or

‘(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); or

‘(2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.

‘(b) ELECTION OF ACTION-

‘(1) IN GENERAL- A person who alleges discharge or other discrimination by any person in violation of subsection (a) may seek relief under subsection (c), by--

‘(A) filing a complaint with the Secretary of Labor; or

‘(B) bringing an action at law or equity in the appropriate district court of the United States.

‘(2) PROCEDURE-

‘(A) IN GENERAL- An action under paragraph (1)(A) shall be governed under the rules and procedures set forth in section 42121(b) of title 49, United States Code.

‘(B) EXCEPTION- Notification made under section 42121(b)(1) of title 49, United States Code, shall be made to the person named in the complaint and to the employer.

‘(C) BURDENS OF PROOF- An action brought under paragraph (1)(B) shall be governed by the legal burdens of proof set forth in section 42121(b) of title 49, United States Code.

‘(D) STATUTE OF LIMITATIONS- An action under paragraph (1) shall be commenced not later than 180 days after the date on which the violation occurs.

‘(c) REMEDIES-

‘(1) IN GENERAL- An employee prevailing in any action under subsection (b)(1) (A) or (B) shall be entitled to all relief necessary to make the employee whole.

‘(A) reinstatement with the same seniority status that the employee would have had, but for the discrimination;

‘(B) 2 times the amount of back pay, with interest; and

‘(C) compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.

‘(3) PUNITIVE DAMAGES-

‘(A) IN GENERAL- In a case in which the finder of fact determines that the protected conduct of the employee under subsection (a) involved a substantial risk to the health, safety,

or welfare of shareholders of the employer or the public, the finder of fact may award punitive damages to the employee.

‘(B) FACTORS- In determining the amount, if any, to be awarded under this paragraph, the finder of fact shall take into account--

‘(i) the significance of the information or assistance provided by the employee under subsection (a) and the role of the employee in advancing any investigation, proceeding, congressional inquiry or action, or internal remedial process, or in protecting the health, safety, or welfare of shareholders of the employer or of the public;

‘(ii) the nature and extent of both the actual and potential discrimination to which the employee was subjected as a result of the protected conduct of the employee under subsection (a); and

‘(iii) the nature and extent of the risk to the health, safety, or welfare of shareholders or the public under subparagraph (A).

‘(d) RIGHTS RETAINED BY EMPLOYEE-

‘(1) OTHER REMEDIES UNAFFECTED- Nothing in this section shall be deemed to diminish the rights, privilege, or remedies of any employee under any Federal or State law, or under any collective bargaining agreement.

‘(2) VOLUNTARY ADJUDICATION- No employee may be compelled to adjudicate his or her rights under this section pursuant to an arbitration agreement.’.

(b) CLERICAL AMENDMENT- The table of sections at the beginning of chapter 73 of title 18, United States Code, is amended by inserting after the item relating to section 1514 the following new item:

‘1514A. Civil action to protect against retaliation in fraud cases.’.

SEC. 108. ESTABLISHMENT OF A RETIREMENT SECURITY FRAUD BUREAU.

(a) IN GENERAL- Part II of title 28, United States Code, is amended by adding at the end the following:

‘CHAPTER 40A--RETIREMENT SECURITY FRAUD BUREAU

‘Sec. 600. Retirement Security Fraud Bureau

‘(a) IN GENERAL- The Attorney General shall establish a Retirement Security Fraud Bureau which shall be a bureau in the Department of Justice.

‘(b) DIRECTOR-

‘(1) APPOINTMENT- The head of the Retirement Security Fraud Bureau shall be the Director who shall be appointed by the Attorney General.

‘(2) DUTIES AND POWERS- The duties and powers of the Director are as follows:

‘(A) Advise and make recommendations on matters relating to pension and securities fraud, in general, to the Assistant Attorney General of the Criminal Division.

‘(B) Maintain a government-wide data access service, with access, in accordance with applicable legal requirements, to the following:

‘(i) Information collected by the Department of Justice, the Department of Labor, the Department of the Treasury, and the Securities and Exchange Commission on pension and securities fraud matters.

‘(ii) Other privately and publicly available information on pension and securities fraud-related activities.

‘(C) Analyze and disseminate the available data in accordance with applicable legal requirements, policies, and guidelines established by the Attorney General to--

‘(iii) determine emerging trends and methods in pension and securities fraud matters; and

‘(iv) support government initiatives against pension and securities fraud-related activities.

‘(D) Furnish research, analytical, and informational services to financial institutions, to appropriate Federal regulatory agencies with regard to financial institutions, and to appropriate Federal, State, local, and foreign law enforcement authorities, in accordance with policies and guidelines established by the Department of Justice, in the interest of detection, prevention, and prosecution of pension and securities fraud-related crimes.

‘(E) Establish and maintain a special unit dedicated to assisting Federal, State, local, and foreign law enforcement and regulatory authorities in combating pension and securities fraud.

‘(F) Such other duties and powers as the Attorney General may delegate or prescribe.

‘(c) AUTHORIZATION OF APPROPRIATIONS- There are authorized to be appropriated for the Retirement Security Fraud Bureau such sums as may be necessary for fiscal years 2003, 2004, 2005, and 2006.’.

(b) CLERICAL AMENDMENT- The table of chapters at the beginning of part II of title 28, United States Code, is amended by adding at the end the following new item:

600’.

SEC. 109. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.

(a) MAIL FRAUD- Section 1341 of title 18, United States Code, is amended by striking ‘five years’ and inserting ‘20 years’.

(b) WIRE FRAUD- Section 1343 of title 18, United States Code, is amended by striking ‘five years’ and inserting ‘20 years’.

(a) DIRECTIVE TO THE UNITED STATES SENTENCING COMMISSION- Pursuant to its authority under section 994(p) of title 18, United States Code, and in accordance with this section, the United States Sentencing Commission shall review and, as appropriate, amend the

Federal Sentencing Guidelines and related policy statements to implement the provisions of this title.

(b) REQUIREMENTS- In carrying out this section, the Sentencing Commission shall--

(1) ensure that the sentencing guidelines and policy statements reflect the serious nature of the offenses and the penalties set forth in this title, the growing incidence of serious fraud offenses which are identified above, and the need to modify the sentencing guidelines and policy statements to deter, prevent, and punish such offenses;

(2) consider the extent to which the guidelines and policy statements adequately address--

(A) whether the guideline offense levels and enhancements for violations of the sections amended by this title are sufficient to deter and punish such offenses, and specifically, are adequate in view of the statutory increases in penalties contained in this title; and

(B) whether a specific offense characteristic should be added in United States Sentencing Guideline section 2B1.1 in order to provide for stronger penalties for fraud when the crime is committed by a corporate officer or director;

(a) IN GENERAL- The Securities Exchange Act of 1934 is amended by inserting after section 21C(c)(2) (15 U.S.C. 78u-3(c)(2)) the following:

‘(3) TEMPORARY FREEZE- (A) Whenever, during the course of a lawful investigation involving possible violations of the Federal securities laws by an issuer of publicly traded securities or any of its directors, officers, partners, controlling persons, agents, or employees, it shall appear to the Commission that it is likely that the issuer will make extraordinary payments (whether compensation or otherwise) to any of the foregoing persons, the Commission may petition a Federal district court for a temporary order requiring the issuer to escrow, subject to court supervision, those payments in an interest-bearing account for 45 days. Such an order shall be entered, if the court finds that the issuer is likely to make such extraordinary payments, only after notice and opportunity for a hearing, unless the court determines that notice and hearing prior to entry of the order would be impracticable or contrary to the public interest. A temporary order shall become effective immediately and shall be served upon the parties subject to it and, unless set aside, limited or suspended by court of competent jurisdiction, shall remain effective and enforceable for 45 days. The period of the order may be extended by the court upon good cause shown for not longer than 45 days, provided that the combined period of the order not exceed 90 days.

‘(B) If the individual affected by such order is charged with violations of the Federal securities laws by the expiration of the 45 days (or the expiration of any extended period), the escrow would continue, subject to court approval, until the conclusion of any legal proceedings. The issuer and the affected director, officer, partner, controlling person, agent or employee would have the right to petition the court for review of the order. If the individual affected by such order is not charged, the escrow will terminate at the expiration of the 45 days (or the expiration of any extended period), and the payments (with accrued interest) returned to the issuer.’.

SEC. 113. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.

‘(a) CERTIFICATION OF PERIODIC FINANCIAL REPORTS- Each periodic report containing financial statements filed by an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) shall be accompanied by a written statement by the chairman of the board, chief executive officer, and chief financial officer (or equivalent thereof) of the issuer.

‘(b) CONTENT- The statement required under subsection (a) shall certify the appropriateness of the financial statements and disclosures contained in the periodic report or financial report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer.

‘(c) CRIMINAL PENALTIES- Notwithstanding any other provision of law--

‘(1) any person who recklessly and knowingly violates any provision of this section shall upon conviction be fined not more than $1,000,000, or imprisoned not more than 10 years, or both; or

‘(2) any person who willfully violates any provision of this section shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.’.

(b) TECHNICAL AND CONFORMING AMENDMENT- The section analysis for chapter 63 of title 18, United States Code, is amended by adding at the end the following:

‘1348. Failure of corporate officers to certify financial reports.’.

TITLE II--STOPPING OFFSHORE TAX HAVENS

SEC. 201. PREVENTION OF CORPORATE EXPATRIATION TO AVOID UNITED STATES INCOME TAX.

(a) IN GENERAL- Paragraph (4) of section 7701(a) of the Internal Revenue Code of 1986 (defining domestic) is amended to read as follows:

‘(4) DOMESTIC-

‘(A) IN GENERAL- Except as provided in subparagraph (B), the term ‘domestic’ when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations.

‘(B) CERTAIN CORPORATIONS TREATED AS DOMESTIC-

‘(i) IN GENERAL- The acquiring corporation in a corporate expatriation transaction shall be treated as a domestic corporation.

‘(ii) CORPORATE EXPATRIATION TRANSACTION- For purposes of this subparagraph, the term ‘corporate expatriation transaction’ means any transaction if--

‘(I) a nominally foreign corporation (referred to in this subparagraph as the ‘acquiring corporation’) acquires, as a result of such transaction, directly or indirectly substantially all of the properties held directly or indirectly by a domestic corporation, and

‘(II) immediately after the transaction, more than 80 percent of the stock (by vote or value) of the acquiring corporation is held by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation.

‘(I) such corporation does not have substantial business activities (when compared to the total business activities of the expanded affiliated group) in the foreign country in which or under the law of which the corporation is created or organized, and

‘(II) the stock of the corporation is publicly traded and the principal market for the public trading of such stock is in the United States.

‘(iv) PARTNERSHIP TRANSACTIONS- The term ‘corporate expatriation transaction’ includes any transaction if--

‘(I) a nominally foreign corporation (referred to in this subparagraph as the ‘acquiring corporation’) acquires, as a result of such transaction, directly or indirectly properties constituting a trade or business of a domestic partnership,

‘(II) immediately after the transaction, more than 80 percent of the stock (by vote or value) of the acquiring corporation is held by former partners of the domestic partnership or related foreign partnerships (determined without regard to stock of the acquiring corporation which is sold in a public offering related to the transaction), and

‘(III) the acquiring corporation meets the requirements of subclauses (I) and (II) of clause (iii).

‘(v) SPECIAL RULES- For purposes of this subparagraph--

‘(I) a series of related transactions shall be treated as 1 transaction, and

‘(II) stock held by members of the expanded affiliated group which includes the acquiring corporation shall not be taken into account in determining ownership.

‘(vi) OTHER DEFINITIONS- For purposes of this subparagraph--

‘(I) NOMINALLY FOREIGN CORPORATION- The term ‘nominally foreign corporation’ means any corporation which would (but for this subparagraph) be treated as a foreign corporation.

‘(II) EXPANDED AFFILIATED GROUP- The term ‘expanded affiliated group’ means an affiliated group (as defined in section 1504(a) without regard to section 1504(b)).

‘(III) RELATED FOREIGN PARTNERSHIP- A foreign partnership is related to a domestic partnership if they are under common control (within the meaning of section 482), or they shared the same trademark or tradename.’

(b) EFFECTIVE DATES-

(1) IN GENERAL- The amendment made by this section shall apply to corporate expatriation transactions completed after September 11, 2001.

(2) SPECIAL RULE- The amendment made by this section shall also apply to corporate expatriation transactions completed on or before September 11, 2001, but only with respect to taxable years of the acquiring corporation beginning after December 31, 2003.

SEC. 202. INCLUSION IN INCOME OF CERTAIN DEFERRED AMOUNTS OF INSIDERS OF CORPORATIONS WHICH EXPATRIATE TO AVOID UNITED STATES INCOME TAX.

(a) IN GENERAL- Part II of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to items specifically included in gross income) is amended by adding at the end the following new section:

‘SEC. 91. UNREALIZED GAIN ON STOCK OPTIONS OF INSIDERS OF CORPORATIONS WHICH EXPATRIATE TO AVOID UNITED STATES INCOME TAX.

‘(a) IN GENERAL- In the case of a corporate insider of any expatriate corporation, the gross income of such insider (for the taxable year during which such corporation becomes an expatriate corporation) shall include as ordinary income the net unrealized built-in gain on options held by such insider to acquire stock in such corporation or in any member of the expanded affiliated group which includes such corporation. Proper adjustments shall be made in the amount of any gain or loss subsequently realized with respect to such options for any amount included in gross income under the preceding sentence.

‘(b) DEFINITIONS- For purposes of this section--

‘(1) CORPORATE INSIDER- The term ‘corporate insider’ means, with respect to a corporation, any individual who is subject to the requirements of

section 16(a) of the Securities Exchange Act of 1934 with respect to such corporation.

‘(2) EXPATRIATE CORPORATION- The term ‘expatriate corporation’ means the acquiring corporation which is treated as a domestic corporation under section 7701(a)(4)(B).

‘(3) NET REALIZED BUILT-IN GAIN- The term ‘net unrealized built-in gain’ means, with respect to options to acquire stock in any corporation, the amount which would be required to be included in gross income were such options exercised.

‘(4) EXPANDED AFFILIATED GROUP- The term ‘expanded affiliated group’ means an affiliated group (as defined in section 1504(a) without regard to section 1504(b)).’

(b) CLERICAL AMENDMENT- The table of sections for such part II is amended by adding at the end the following new item:

‘Sec. 91. Unrealized gain on stock options of insiders of corporations which expatriate to avoid united states income tax..’

(c) EFFECTIVE DATE- The amendments made by this section shall apply with respect to corporate expatriation transactions completed after September 11, 2001, and to taxable years ending after such date.

TITLE III--MAKING EXECUTIVES ACCOUNTABLE

(a) IN GENERAL- Paragraph (4) of section 162(m) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:

‘(G) CERTAIN FACTORS NOT PERMITTED TO BE TAKEN INTO ACCOUNT IN DETERMINING WHETHER PERFORMANCE GOALS ARE MET- Subparagraph (C) shall not apply if, in determining whether the performance goals are met, any of the following are taken into account:

‘(i) Cost savings as a result of changes to any qualified employer plan (as defined in section 4972(d)).

‘(ii) Excess assets of such a plan or earnings thereon.

‘(iii) Any excess of the amount assumed to be the return on the assets of such a plan over the actual return on such assets.’

(b) EFFECTIVE DATE- The amendment made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

‘(a) IN GENERAL- If an employer maintains a defined contribution plan to which employer contributions are made in the form of employer stock and such employer maintains a funded deferred compensation plan--

‘(1) compensation of any corporate insider which is deferred under such funded deferred compensation plan shall be included in the gross income of the insider or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation, and

‘(2) the tax treatment of any amount made available under the plan to a corporate insider or beneficiary shall be determined under section 72 (relating to annuities, etc.).

‘(b) FUNDED DEFERRED COMPENSATION PLAN- For purposes of this section--

‘(1) IN GENERAL- The term ‘funded deferred compensation plan’ means any plan providing for the deferral of compensation unless--

‘(A) the employee’s rights to the compensation deferred under the plan are no greater than the rights of a general creditor of the employer, and

‘(B) all amounts set aside (directly or indirectly) for purposes of paying the deferred compensation, and all income attributable to such amounts, remain (until made available to the participant or other beneficiary) solely the property of the employer (without being restricted to the provision of benefits under the plan), and

‘(C) the amounts referred to in subparagraph (B) are available to satisfy the claims of the employer’s general creditors at all times (not merely after bankruptcy or insolvency).

Such term shall not include a qualified employer plan.

‘(2) SPECIAL RULES-

‘(A) EMPLOYEE’S RIGHTS- A plan shall be treated as failing to meet the requirements of paragraph (1)(A) unless--

‘(i) the compensation deferred under the plan is paid only upon separation from service, death, or at a specified time (or pursuant to a fixed schedule), and

‘(ii) the plan does not permit the acceleration of the time such deferred compensation is paid by reason of any event.

If the employer and employee agree to a modification of the plan that accelerates the time for payment of any deferred compensation, then all compensation previously deferred under the plan shall be includible in gross income for the taxable year during which such modification takes effect and the taxpayer shall pay interest at the underpayment rate on the underpayments that would have occurred had the deferred compensation been includible in gross income when deferred.

‘(B) CREDITOR’S RIGHTS- A plan shall be treated as failing to meet the requirements of paragraph (1)(B) with respect to amounts set aside in a trust unless--

‘(i) the employee has no beneficial interest in the trust,

‘(ii) assets in the trust are available to satisfy claims of general creditors at all times (not merely after bankruptcy or insolvency), and

‘(iii) there is no factor (such as the location of the trust outside the United States) that would make it more difficult for general creditors to reach the assets in the trust than it would be if the trust assets were held directly by the employer in the United States.

‘(c) CORPORATE INSIDER- For purposes of this section, the term ‘corporate insider’ means, with respect to a corporation, any individual who is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to such corporation.

‘(d) OTHER DEFINITIONS- For purposes of this section--

‘(1) PLAN INCLUDES ARRANGEMENTS, ETC- The term ‘plan’ includes any agreement or arrangement.

‘(2) SUBSTANTIAL RISK OF FORFEITURE- The rights of a person to compensation are subject to a substantial risk of forfeiture if such person’s rights to such compensation are conditioned upon the future performance of substantial services by any individual.’

(b) CLERICAL AMENDMENT- The table of sections for such subpart A is amended by adding at the end the following new item:

(a) IN GENERAL- Section 4999 of the Internal Revenue Code of 1986 (relating to golden parachute payments) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

‘(c) TAX TO APPLY TO DEFERRED COMPENSATION PAID AFTER MAJOR STOCK VALUE DECLINE OR BANKRUPTCY-

‘(1) IN GENERAL- For purposes of this section, the term ‘excess parachute payment’ includes severance pay, and any other payment of deferred compensation, which is received by a corporate insider after the date that the insider ceases to be employed by the corporation if--

‘(A) there is at least a 75-percent decline in the value of the stock in such corporation during the 1-year period ending on such date, or

‘(B) such corporation becomes a debtor in a title 11 or similar case (as defined in section 368(a)(3)(A)) during the 180-day period beginning 90 days before such date.

Such term shall not include any payment from a qualified employer plan.

‘(2) CORPORATE INSIDER- For purposes of paragraph (1), the term ‘corporate insider’ means, with respect to a corporation, any individual who is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to such corporation.’

(b) EFFECTIVE DATE- The amendment made by this section shall apply with respect to cessations of employment after the date of the enactment of this Act.

SEC. 304. GOVERNANCE PRACTICES TO PROHIBIT INSIDER LOANS.

(a) RULEMAKING REQUIRED-

(1) PROHIBITED LOANS- Every national securities exchange and national securities association shall adopt rules, effective no later than 6 months after the date of enactment of this Act, to require that the qualitative listing standards concerning corporate governance of the exchange or association prohibit loans or other extensions of credit that in the aggregate exceed $50,000 to any corporate insider.

(2) DEFINITION OF CORPORATE INSIDER- For purposes of paragraph (1), the term ‘corporate insider’ with respect to any issuer means any person who is a beneficial owner, officer, or director who is required to file a statement under section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) with respect to ownership of the equity securities of such issuer.

(3) OTHER DEFINITIONS- For purposes of paragraph (1), the terms ‘national securities exchange’ and ‘national securities association’ have the same meanings provided in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c).

(b) PROCEDURE- The rules required by subsection (a) of this section shall be adopted by any national securities exchange or national securities association pursuant to section 19(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78s(b)). If the rules required by this section have not been adopted by any national securities exchange and national securities association and made effective by 9 months after the date of enactment of this Act, the Securities and Exchange Commission shall initiate proceedings to add the rules required by this section to the rules of such national securities exchange and national securities association.

(c) NO ADVERSE INFERENCE- Nothing in this section shall be construed to alter, impair, limit, or abrogate the Security and Exchange Commission’s power under section 19(c) of the Securities Exchange Act of 1934 to abrogate, add to, and delete from the rules of a self-regulatory organization (other than a registered clearing agency) as the Securities and Exchange Commission deems necessary or appropriate.

(1) SECURITIES ACT OF 1933- Section 8A of the Securities Act of 1933 (15 U.S.C. 77h-1) is amended by adding at the end the following new subsection:

‘(f) AUTHORITY TO PROHIBIT PERSONS FROM SERVING AS OFFICERS OR DIRECTORS- In any cease-and-desist proceeding under subsection (a), the Commission may issue an order to prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who has violated section 17(a)(1) of this title from acting as an officer or director of any issuer that has a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934 or that is required to file reports pursuant to section 15(d) of that Act if the person’s conduct demonstrates

unfitness to serve as an officer or director of any such issuer.’.

(2) SECURITIES EXCHANGE ACT OF 1934- Section 21C of the Securities Exchange Act of 1934 (15 U.S.C. 78u-3) is amended by adding at the end the following new subsection:

‘(f) AUTHORITY TO PROHIBIT PERSONS FROM SERVING AS OFFICERS OR DIRECTORS- In any cease-and-desist proceeding under subsection (a), the Commission may issue an order to prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who has violated section 10(b) of this title or the rules or regulations thereunder from acting as an officer or director of any issuer that has a class of securities registered pursuant to section 12 of this title or that is required to file reports pursuant to section 15(d) of this title if the person’s conduct demonstrates unfitness to serve as an officer or director of any such issuer.’.

SEC. 306. DISGORGEMENT REQUIRED.

(a) ADMINISTRATIVE ACTIONS- Within 30 days after the date of enactment of this Act, the Securities and Exchange Commission shall prescribe regulations to require disgorgement, in a proceeding pursuant to its authority under section 21A, 21B, or 21C of the Securities Exchange Act of 1934 (15 U.S.C. 78u-1, 78u-2, 78u-3), of salaries, commissions, fees, bonuses, options, profits from securities transactions, and losses avoided through securities transactions obtained by an officer or director of an issuer during or for a fiscal year or other reporting period if such officer or director engaged in misconduct resulting in, or made or caused to be made in, the filing of a financial statement for such fiscal year or reporting period which--

(1) was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact; or

(2) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading,

(b) JUDICIAL PROCEEDINGS- Section 21(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended by adding at the end the following new paragraph:

‘(5) ADDITIONAL DISGORGEMENT AUTHORITY- In any action or proceeding brought or instituted by the Commission under the securities laws against any person--

‘(A) for engaging in misconduct resulting in, or making or causing to be made in, the filing of a financial statement which--

‘(i) was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact; or

‘(ii) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; or

‘(B) for engaging in, causing, or aiding and abetting any other violation of the securities laws or the rules and regulations thereunder,

such person, in addition to being subject to any other appropriate order, may be required to disgorge any or all benefits received from any source in connection with the conduct constituting, causing, or aiding and abetting the violation, including (but not limited to) salary, commissions, fees, bonuses, options, profits from securities transactions, and losses avoided through securities transactions.’.

SEC. 307. CEO AND CFO ACCOUNTABILITY FOR DISCLOSURE.

(a) REGULATIONS REQUIRED- The Securities and Exchange Commission shall by rule require, for each company filing periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)), that the principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, certify in each annual or quarterly report filed or submitted under either such section of such Act that--

(1) the signing officer has reviewed the report;

(2) based on the officer’s knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;

(3) based on such officer’s knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report;

(4) the signing officers--

(A) are responsible for establishing and maintaining internal controls;

(B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared;

(C) have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; and

(D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;

(5) the signing officers have disclosed to the issuer’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function)--

(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer’s ability to record, process, summarize, and report financial data and have identified for the issuer’s auditors any material weaknesses in internal controls; and

(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls; and

(6) the signing officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

(b) ENFORCEMENT- A violation by any person of this section, any rule or regulation of the Commission issued under this section, shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or the rules and regulations issued thereunder, consistent with the provisions of this section, and any such person shall be subject to the same penalties, and to the same extent, as for a violation of that Act or such rules or regulations.

(c) DEADLINE- The rules required by subsection (a) shall be effective not later than 30 days after the date of enactment of this Act.

SEC. 308. INCREASED COMPENSATION LIMIT NOT TO RESULT IN REDUCED BENEFITS FOR THE NONHIGHLY COMPENSATED.

(a) IN GENERAL- Paragraph (17) of section 401(a) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:

‘(C) BENEFITS MAY NOT DECREASE- Subparagraphs (A) and (B) shall be applied by substituting ‘$150,000’ for ‘$200,000’ with respect to a plan for any year if any employee’s benefit under the plan would decrease were the $200,000 amount used by the plan instead of the $150,000 amount.’

(b) DEDUCTION LIMITATION- Subsection (l) of section 404 of such Code is amended by adding at the end the following new sentence: ‘The preceding sentences of this subsection shall be applied by substituting ‘$150,000’ for ‘$200,000’ with respect to a plan for any year if any employee’s benefit under the plan would decrease were the $200,000 amount used by the plan instead of the $150,000 amount.’

(c) SIMPLIFIED EMPLOYEE PENSIONS- Subsection (k) of section 408 of such Code is amended by redesignating paragraph (9) as paragraph (10) and by inserting after paragraph (8) the following new paragraph:

‘(9) LOWER COMPENSATION LIMITATION IF BENEFITS DECREASE- Paragraphs (3)(C) and (6)(D) shall be applied by substituting ‘$150,000’ for ‘$200,000’ with respect to a plan for any year if any employee’s benefit under the plan would decrease were the $200,000 amount used by the plan instead of the $150,000 amount.’

(d) CERTAIN TAX-EXEMPT ORGANIZATIONS- Paragraph (7) of section 505(b) of such Code is amended by adding at the end the following new sentence: ‘The preceding sentences of this subsection shall be applied by substituting ‘$150,000’ for ‘$200,000’ with respect to a plan for any year if any employee’s benefit under the plan would decrease were the $200,000 amount used by the plan instead of the $150,000 amount.’

(e) EFFECTIVE DATE- The amendments made by this section shall apply to years beginning after the date of the enactment of this Act.

SEC. 309. MATCHING CONTRIBUTIONS NOT TAKEN INTO ACCOUNT FOR MINIMUM CONTRIBUTION REQUIREMENTS UNDER TOP-HEAVY PLAN RULES.

(a) IN GENERAL- Subparagraph (A) of section 416(c)(2) of the Internal Revenue Code of 1986 is amended by striking the last sentence.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to years beginning after the date of the enactment of this Act.

TITLE IV--ASSURING THE INTEGRITY OF WALL STREET AND RESTORING FAITH IN THE MARKETS

SEC. 401. REAL-TIME DISCLOSURE OF FINANCIAL INFORMATION.

(a) REAL-TIME ISSUER DISCLOSURES REQUIRED-

(1) OBLIGATIONS- Every issuer of a security registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) shall file with the Commission and disclose to the public, on a rapid and essentially contemporaneous basis, such information concerning the financial condition or operations of such issuer as the Commission determines by rule is necessary in the public interest and for the protection of investors. Such rule shall--

(A) specify the events or circumstances giving rise to the obligation to disclose or update a disclosure;

(B) establish requirements regarding the rapidity and timeliness of such disclosure;

(C) identify the means whereby the disclosure required shall be made, which shall ensure the broad, rapid, and accurate dissemination of the information to the public via electronic or other communications device;

(D) identify the content of the information to be disclosed; and

(E) without limiting the Commission’s general exemptive authority, specify any exemptions or exceptions from such requirements.

(2) ENFORCEMENT- The Commission shall have exclusive authority to enforce this section and any rule or regulation hereunder in civil proceedings.

(b) ELECTRONIC DISCLOSURE OF INSIDER TRANSACTIONS-

(1) DISCLOSURES OF TRADING- The Commission shall, by rule, require--

(A) that a disclosure required by section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) of the sale of any securities of an issuer, or any security futures product (as defined in section 3(a)(56) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(56))) or

any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) that is based in whole or in part on the securities of such issuer, by an officer or director of the issuer of those securities, or by a beneficial owner of such securities, shall be made available electronically to the Commission and to the issuer by such officer, director, or beneficial owner before the end of the next business day after the day on which the transaction occurs;

(B) that the information in such disclosure be made available electronically to the public by the Commission, to the extent permitted under applicable law, upon receipt, but in no case later than the end of the next business day after the day on which the disclosure is received under subparagraph (A); and

(C) that, in any case in which the issuer maintains a corporate website, such information shall be made available by such issuer on that website, before the end of the next business day after the day on which the disclosure is received by the Commission under subparagraph (A).

(2) TRANSACTIONS INCLUDED- The rule prescribed under paragraph (1) shall require the disclosure of the following transactions:

(A) Direct or indirect sales or other transfers of securities of the issuer (or any interest therein) to the issuer or an affiliate of the issuer.

(B) Loans or other extensions of credit extended to an officer, director, or other person affiliated with the issuer on terms or conditions not otherwise available to the public.

(3) OTHER FORMATS; FORMS- In the rule prescribed under paragraph (1), the Commission shall provide that electronic filing and disclosure shall be in lieu of any other format required for such disclosures on the day before the date of enactment of this subsection. The Commission shall revise such forms and schedules required to be filed with the Commission pursuant to paragraph (1) as necessary to facilitate such electronic filing and disclosure.

SEC. 402. IMPROVED TRANSPARENCY OF CORPORATE DISCLOSURES.

(a) MODIFICATION OF REGULATIONS REQUIRED- The Commission shall revise its regulations under the securities laws pertaining to the disclosures required in periodic financial reports and registration statements to require such reports to include adequate and appropriate disclosure of--

(1) the issuer’s off-balance sheet transactions and relationships with unconsolidated entities or other persons, to the extent they are not disclosed in the financial statements and are reasonably likely to materially affect the liquidity or the availability of, or requirements for, capital resources, or the financial condition or results of operations of the issuer; and

(2) loans extended to officers, directors, or other persons affiliated with the issuer on terms or conditions that are not otherwise available to the public.

(b) DEADLINE FOR RULEMAKING- The Commission shall--

(1) within 90 days after the date of enactment of this Act, propose, and

(2) within 270 days after such date, prescribe,

the revisions to its regulations required by subsection (a).

(c) ANALYSIS REQUIRED-

(1) TRANSPARENCY, COMPLETENESS, AND USEFULNESS OF FINANCIAL STATEMENTS- The Commission shall conduct an analysis of the extent to which, consistent with the protection of investors and the public interest, disclosure of additional or reorganized information may be required to improve the transparency, completeness, or usefulness of financial statements and other corporate disclosures filed under the securities laws.

(2) ALTERNATIVES TO BE CONSIDERED- In conducting the analysis required by paragraph (1), the Commission shall consider--

(A) requiring the identification of the key accounting principles that are most important to the issuer’s reported financial condition and results of operation, and that require management’s most difficult, subjective, or complex judgments;

(B) requiring an explanation, where material, of how different available accounting principles applied, the judgments made in their application, and the likelihood of materially different reported results if different assumptions or conditions were to prevail;

(C) in the case of any issuer engaged in the business of trading non-exchange traded contracts, requiring an explanation of such trading activities when such activities require the issuer to account for contracts at fair value, but for which a lack of market price quotations necessitates the use of fair value estimation techniques;

(D) establishing requirements relating to the presentation of information in clear and understandable format and language; and

(E) requiring such other disclosures, included in the financial statements or in other disclosure by the issuer, as would in the Commission’s view improve the transparency of such issuer’s financial statements and other required corporate disclosures.

(3) RULES REQUIRED- If the Commission, on the basis of the analysis required by this subsection, determines that it is necessary in the public interest or for the protection of investors and would improve the transparency of issuer financial statements, the Commission may prescribe rules reflecting the results of such analysis and the considerations required by paragraph (2). In prescribing such rules, the Commission may seek to minimize the paperwork and cost burden on the issuer consistent with achieving the public interest and investor protection purposes of such rules.

SEC. 403. IMPROVEMENTS IN REPORTING ON INSIDER TRANSACTIONS AND RELATIONSHIPS.

(a) SPECIFIC OBJECTIVES- The Commission shall initiate a proceeding to propose changes in its rules and regulations with respect to financial reporting to improve the transparency and clarity of the information available to investors and to require increased financial disclosure with respect to the following:

(A) between the issuer, affiliates of the issuer, and officers, directors, or employees of the issuer or such affiliates; and

(B) between officers, directors, employees, or affiliates of the issuer and entities that are not otherwise affiliated with the issuer,

to the extent such arrangement or transaction creates a conflict of interest for such persons. Such disclosure shall provide a description of such elements of the transaction as are necessary for an understanding of the business purpose and economic substance of such transaction (including contingencies). The disclosure shall provide sufficient information to determine the effect on the issuer’s financial statements and describe compensation arrangements of interested parties to such transactions.

(2) RELATIONSHIPS WITH PHILANTHROPIC ORGANIZATIONS- Relationships between the registrant or any executive officer of the registrant and any not-for-profit organization on whose board a director or immediate family member serves or of which a director or immediate family member serves as an officer or in a similar capacity. Relationships that shall be disclosed include contributions to the organization in excess of $10,000 made by the registrant or any executive officer in the last five years and any other activity undertaken by the registrant or any executive officer that provides a material benefit to the organization. Material benefit includes lobbying.

(3) INSIDER-CONTROLLED AFFILIATES- Relationships in which the registrant or any executive officer exercises significant control over an entity in which a director or immediate family member owns an equity interest or to which a director or immediate family member has extended credit. Significant control should be defined with reference to the contractual and governance arrangements between the registrant or executive officer, as the case may be, and the entity.

(4) JOINT OWNERSHIP- Joint ownership by a registrant or executive officer and a director or immediate family member of any real or personal property.

(5) PROVISION OF SERVICES BY RELATED PERSONS- The provision of any professional services, including legal, financial advisory or medical services, by a director or immediate family member to any executive officer of the registrant in the last five years.

(b) DEADLINES- The Commission shall complete the rulemaking required by this section within 180 days after the date of enactment of this Act.

SEC. 404. ANALYST CONFLICTS OF INTEREST.

(1) in subsection (c), by adding at the end the following new paragraph:

‘(9) ANALYST CONFLICTS OF INTEREST-

‘(A) RULES REQUIRED- Except as the Commission may otherwise provide pursuant to section 36, no broker, dealer, or person associated with a broker or dealer shall violate such rules as the Commission shall prescribe as necessary and appropriate in the public interest and for the protection of investors to prevent conflicts of interest in the preparation and rendering of equity security analyst recommendations. Such rules shall--

‘(i) prohibit equity research analysts from holding any beneficial interest in any equity security in any issuer covered by such analyst;

‘(ii) require a broker or dealer to include a legend on the first page of each equity security research report that investors should assume that the broker or dealer is seeking or will seek investment banking or other business from the company covered by such report (hereinafter in this paragraph referred to as the ‘covered company’);

‘(iii) require a broker or dealer to include on each equity security research report a specific disclosure, on a percentage basis, of the aggregate distribution, calculated quarterly, of the intermediate-term rating category used by the broker or dealer for--

‘(I) all stocks in the sector or industry group applicable to the covered company;

‘(II) all stocks in the sector or industry group applicable to the covered company for which, over the prior 12 months, the broker or dealer performed services in publicly announced equity underwritings and merger and acquisition transactions for which compensation was received or to which the broker or dealer is entitled;

‘(III) all stocks covered by the broker’s or dealer’s equity security research; and

‘(IV) all stocks covered by the broker’s or dealer’s equity security research for which, over the prior 12 months, the broker or dealer performed services in publicly announced equity security underwriting or merger and acquisition transactions for which compensation was received or to which the broker or dealer is entitled;

‘(iv) require a broker or dealer to separate completely the evaluation and determination of compensation for United States-based equity research analysts from the broker’s or dealer’s investment banking business by--

‘(I) requiring that research analysts be compensated for only those activities and services intended to benefit the broker’s or dealer’s investor clients;

‘(II) with respect to analyst compensation, requiring the broker or dealer to prohibit anyone responsible for determining research analysts’ compensation from soliciting from any analyst, or considering in determining any analyst’s compensation, either (aa) the amount of investment banking revenue received from clients covered by such analyst, or (bb) the analyst’s participation in investment banking transactions, except to the extent such activities and services are intended to benefit investors, as specifically contemplated by subclause (I);

‘(III) prohibiting research analysts from being evaluated by investment bankers for any work such analysts may do to generate investment banking business, including participation in investment banking client solicitations;

‘(IV) prohibiting investment bankers from communicating with research analysts or with anyone responsible for determining analysts’ compensation for the purpose of calculating or influencing an individual analyst’s compensation; and

‘(V) prohibiting consideration of any such input from investment bankers by anyone responsible for determining research analysts’ compensation;

‘(v) require a broker or dealer to establish or designate a specific management structure to have responsibility for determining research analyst compensation and to evaluate analysts for compensation purposes based primarily upon--

‘(I) quality of analysts’ research and performance of their investment recommendations;

‘(II) competitive compensation factors;

‘(III) surveys and input from investor clients; and

‘(IV) surveys and input from the broker’s or dealer’s institutional sales, equity trading, and private client divisions, but not from the investment banking division;

‘(vi) require a broker or dealer to establish or designate a specific management structure to supervise equity research recommendations for objectivity, integrity, and a rigorous analytical framework in the development of all recommendations;

‘(vii) require a broker or dealer to implement a system to monitor electronic communications between investment bankers and equity security research analysts;

‘(viii) require that equity security research analyst participation with investment bankers in solicitations for any potential investment banking transaction be approved in advance by the management structure established under clause (v) and be disclosed to the management structure established under clause (vi);

‘(ix) require that each equity security research report covering a particular company to disclose whether, within the prior 12 months, any equity security research analyst covering such company has participated in a solicitation with or at the request of investment bankers for an investment banking transaction underwritten by the broker or dealer;

‘(x) prohibit equity security analysts, investment bankers, or any other employees of the broker or dealer from promising, implying, offering, or communicating in any way that a specific recommendation or change of an existing recommendation will be made in exchange for the awarding of an investment banking transaction to the broker or dealer;

‘(xi) prohibit equity security analysts from changing any research recommendation because of the subject company’s decision not to retain the broker or dealers for investment banking services;

‘(xii) require that the materials used in connection with any solicitation for a public equity underwriting by the broker or dealer include a written disclosure that--

‘(I) the broker or dealer prohibits employees from, directly or indirectly, offering a favorable research rating or specific price target, or offering to change a rating or price target to a subject company as consideration or inducement for the receipt of business or for compensation; and

‘(II) equity security research analysts are prohibited from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investor clients;

‘(xiii) require that, whenever a broker or dealer terminates coverage of any issuer, the broker or dealer publish a report disclosing--

‘(I) the broker’s or dealer’s termination of coverage;

‘(II) the rationale for the decision to terminate coverage; and

‘(III) that, effective upon the termination of coverage, the last recommendation issued for the particular stock should not be relied upon going forward;

‘(xiv) require a broker or dealer to designate an employee or group of employees as a compliance monitor to ensure compliance with the policies required by this paragraph, and to be available to research analysts to address issues of actual or perceived undue influence or pressure from investment banking or any other source; and

‘(xv) otherwise prohibit conflicts of interest in the preparation or rendering of equity research analyst recommendations.

‘(B) CONSULTATION- The Commission shall consult periodically the securities commissions (or any agency or office performing like functions) of the States concerning the adequacy of the requirements established under this paragraph.’.

(a) IN GENERAL- The Securities and Exchange Commission shall by rule require each national securities exchange and national securities association to adopt rules, effective no later than 6 months after the date of enactment of this Act, to require that the qualitative listing standards concerning corporate governance of the exchange or association require that an issuer meet the following requirements:

(1) INDEPENDENT DIRECTORS-

(A) MAJORITY REQUIREMENT- An issuer shall have a majority of independent directors.

(B) QUALIFICATION AS INDEPENDENT DIRECTOR-

(i) No director may qualify as an independent director unless the board of directors affirmatively determines that the director has no material relationship with the issuer, either directly or as a partner, shareholder, or officer of an organization that has a close relationship with the issuer.

(ii) No director who is a former employee of the issuer may qualify as an independent director until 5 years after the employment has ended.

(iii) No director who is, or in the past 5 years has been, affiliated with or employed by a present or former auditor of the issuer (or of an affiliate) may qualify as an independent director until 5 years after the end of either the affiliation, the employment, or the auditing relationship.

(iv) No director may qualify as an independent director if such director is, or in the past 5 years has been, part of an interlocking directorate in which an executive officer of the issuer serves on the compensation committee of another company that employs the director.

(v) No director may qualify as an independent director if an immediate family member of such director would not qualify as an independent director under clauses (i) through (iv).

(2) NON-MANAGEMENT DIRECTORS- The non-management directors of an issuer shall meet at regularly scheduled executive sessions without management, and such directors shall be required to designate who will preside at such sessions.

(3) NOMINATING AND CORPORATE GOVERNANCE COMMITTEE-

(A) IN GENERAL- An issuer shall have a nominating and corporate governance committee composed entirely of independent directors.

(B) WRITTEN CHARTER- The nominating and corporate governance committee shall have a written charter that specifies--

(i) the committee’s purpose, which, at minimum, shall be to identify individuals qualified to become board members, and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders, and to develop and recommend to the board a set of corporate governance principles applicable to the issuer;

(ii) the committee’s goals and responsibilities, which shall reflect, at minimum, the board’s criteria for selecting new directors, and oversight of the evaluation of the board and management; and

(iii) the criteria for an annual performance evaluation of the committee.

(4) COMPENSATION COMMITTEE-

(A) IN GENERAL- An issuer shall have a compensation committee composed entirely of independent directors.

(B) WRITTEN CHARTER- The compensation committee shall have a written charter that specifies--

(i) the committee’s purpose, which, at minimum, shall be to discharge the board’s responsibilities relating to compensation of the issuer’s executives, and to produce an annual report on executive compensation for inclusion in the issuer’s proxy statement, in accordance with applicable rules and regulations;

(ii) the committee’s duties and responsibilities, which, at minimum, shall be to review and improve corporate goals and objectives relevant to executive compensation, evaluate the executives’ performance in light of these goals and objectives, and set the executive compensation level based on this evaluation, and to make recommendations to the board with respect to incentive-compensation plans and equity-based plans; and

(iii) the criteria for an annual performance evaluation of the compensation committee.

(A) Director’s fees shall be the only compensation that an audit committee member may receive from the issuer.

(B) A director who is an independent director within the requirements of paragraph (1), but who also holds 20 percent or more of an issuer’s stock, or who is general partner, controlling shareholder, or officer of any such holder, shall not chair, or be a voting member of, the audit committee.

(6) INCREASED AUTHORITY AND WRITTEN CHARTER OF AUDIT COMMITTEE- An issuer shall grant to the audit committee the sole authority to hire and fire independent auditors, and shall approve any significant non-audit relationship of the issuer with the independent auditors. The audit committee shall have a written charter that specifies--

(A) the committee’s purpose, which, at minimum, shall be--

(i) to assist board oversight of--

(I) the integrity of the issuer’s financial statements;

(II) the issuer’s compliance with legal and regulatory requirements;

(III) the independent auditor’s qualifications and independence; and

(IV) audit function and independent auditors; and

(ii) to prepare the report that the Commission’s rules require be included in the issuer’s annual proxy statement;

(B) the duties and responsibilities of the audit committee, which, at minimum, shall be--

(i) to retain and terminate the issuer’s independent auditors;

(ii) to obtain and review, on an annual basis, a report by the independent auditor describing the firm’s internal quality control standards and any material issues raised by the most recent internal quality control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding 5 years, respecting one or more independent audits carried out by the firm, and any steps to be taken to deal with any such issues;

(iii) to examine all relationships between the independent auditor and the issuer in order to assess the auditor’s independence;

(iv) to discuss the audited financial statements and quarterly financial statements with management and the independent auditor;

(v) to discuss earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies;

(vi) to discuss policies with respect to risk assessment and risk management;

(vii) to meet separately, on at least a quarterly basis, with management, with internal auditors, and with independent auditors;

(viii) to review with the independent auditor any audit problems or difficulties and management’s response;

(ix) to set clear hiring policies for employees or former employees of the independent auditors; and

(x) to report regularly to the board of directors on the performance of the duties and responsibilities of the committee as outlined in this subparagraph; and

(C) the criteria for an annual performance evaluation of the audit committee.

(7) SHAREHOLDER CONTROL OF EQUITY-COMPENSATION PLANS- An issuer shall provide shareholders of the issuer the opportunity to vote on all equity-compensation plans.

(9) CODE OF BUSINESS CONDUCT AND ETHICS STANDARDS- An issuer shall adopt and disclose a code of business conduct and ethics standards for directors, officers, and employees which, at minimum, includes standards on--

(A) conflicts of interest;

(B) use of corporate property, information, or position for personal gain;

(C) confidentiality;

(D) issues of fair dealing with the issuer’s customers, suppliers, competitors, and employees;

(G) methods of encouraging the reporting of any illegal or unethical behavior.

Subtitle B--Strengthening Auditor Independence and Industry Oversight

Chapter 1--Auditor Independence

SEC. 411. SERVICES OUTSIDE THE SCOPE OF PRACTICE OF AUDITORS.

(a) PROHIBITED ACTIVITIES- Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1) is amended by adding at the end the following:

‘(g) PROHIBITED ACTIVITIES- It shall be unlawful for a registered public accounting firm (and any associated person of that firm, to the extent determined appropriate by the Commission) that performs for any issuer any audit required by this title or the rules of the Commission under this title or the rules of the public regulatory organization established under section 421, to provide to that issuer, contemporaneously with the audit, any non-audit service, including--

‘(1) bookkeeping or other services related to the accounting records or financial statements of the audit client;

‘(9) any other service that the public regulatory organization established under section 421 determines, by regulation, is impermissible.

‘(h) PREAPPROVAL REQUIRED FOR NON-AUDIT SERVICES- A registered public accounting firm may engage in any non-audit service, including tax services, that is not described in any of paragraphs (1) through (9) of subsection (g) for an audit client, only if the activity is approved in advance by the audit committee of the issuer, in accordance with subsection (i).’.

(b) EXEMPTION AUTHORITY- The public regulatory organization established under section 421 may, on a case by case basis, exempt any person, issuer, public accounting firm, or transaction from the prohibition on the provision of services under section 10A(g) of the Securities Exchange Act of 1934 (as added by this section), to the extent that such exemption is necessary or appropriate in the public interest and is consistent with the protection of investors, and subject to review by the Commission in the same manner as for rules of the public regulatory organization established under section 421 under section 107.

SEC. 412. PREAPPROVAL REQUIREMENTS.

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1), as amended by this Act, is amended by adding at the end the following:

‘(i) PREAPPROVAL REQUIREMENTS-

‘(1) IN GENERAL-

‘(A) AUDIT COMMITTEE ACTION- All auditing services (which may entail providing comfort letters in connection with securities underwritings) and non-audit services, other than as provided in subparagraph (B), provided to an issuer by the auditor of the issuer shall

be preapproved by the audit committee of the issuer.

‘(B) DE MINIMUS EXCEPTION- The preapproval requirement under subparagraph (A) is waived with respect to the provision of non-audit services for an issuer, if--

‘(i) the aggregate amount of all such non-audit services provided to the issuer constitutes not more than 5 percent of the total amount of revenues paid by the issuer to its auditor;

‘(ii) such services were not recognized by the issuer at the time of the engagement to be non-audit services; and

‘(iii) such services are promptly brought to the attention of the audit committee of the issuer and approved by the audit committee prior to the completion of the audit, by 1 or more members of the audit committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the audit committee.

‘(2) DISCLOSURE TO INVESTORS- Approval by an audit committee of an issuer under this subsection of a non-audit service to be performed by the auditor of the issuer shall be disclosed to investors in periodic reports required by section 13(a).

‘(3) DELEGATION AUTHORITY- The audit committee of an issuer may delegate to 1 or more designated members of the audit committee who are independent directors of the board of directors, the authority to grant preapprovals required by this subsection. The decisions of any member to whom authority is delegated under this paragraph to preapprove an activity under this subsection shall be presented to the full audit committee at each of its scheduled meetings.

‘(4) APPROVAL OF AUDIT SERVICES FOR OTHER PURPOSES- In carrying out its duties under subsection (m)(2), if the audit committee of an issuer approves an audit service within the scope of the engagement of the auditor, such audit service shall be deemed to have been preapproved for purposes of this subsection.’.

SEC. 413. AUDIT PARTNER ROTATION.

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1), as amended by this Act, is amended by adding at the end the following:

‘(j) AUDIT PARTNER ROTATION- It shall be unlawful for a registered public accounting firm to provide audit services to an issuer if the lead audit partner (having primary responsibility for the audit) or the audit partner responsible for reviewing the audit that is assigned to perform those audit services has performed audit services for that issuer in each of the 5 previous fiscal years of that issuer.’.

SEC. 414. AUDITOR REPORTS TO AUDIT COMMITTEES.

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1), as amended by this Act, is amended by adding at the end the following:

‘(k) REPORTS TO AUDIT COMMITTEES- Each registered public accounting firm that performs for any issuer any audit required by this title shall timely report to the audit committee of the issuer--

‘(1) all critical accounting policies and practices to be used;

‘(2) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the issuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and

‘(3) other material written communications between the registered public accounting firm and the management of the issuer, such as any management letter or schedule of unadjusted differences.’.

SEC. 415. CONFORMING AMENDMENTS.

(a) DEFINITIONS- Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following:

‘(58) AUDIT COMMITTEE- The term ‘audit committee’ means--

‘(A) a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and

‘(B) if no such committee exists with respect to an issuer, the entire board of directors of the issuer.

‘(59) REGISTERED PUBLIC ACCOUNTING FIRM- The term ‘registered public accounting firm’ has the same meaning as in section 3 of the Public Company Accounting Reform and Investor Protection Act of 2002.’.

(1) in section 12(b)(1) (15 U.S.C. 78l(b)(1)), by striking ‘independent public accountants’ each place that term appears and inserting ‘a registered public accounting firm’; and

(2) in subsections (e) and (i) of section 17 (15 U.S.C. 78q), by striking ‘an independent public accountant’ each place that term appears and inserting ‘a registered public accounting firm’.

SEC. 416. CONFLICTS OF INTEREST.

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1), as amended by this Act, is amended by adding at the end the following:

‘(l) CONFLICTS OF INTEREST- It shall be unlawful for a registered public accounting firm to perform for an issuer any audit service required by this title, if a chief executive officer, controller, chief financial officer, chief accounting officer or any person serving in an equivalent position for the issuer was employed by that registered independent public accounting firm and participated in any capacity in the audit of that issuer during the 1-year period preceding the date of the initiation of the audit.’.

(a) STUDY AND REVIEW REQUIRED- The Comptroller General of the United States shall conduct a study and review of the potential effects of requiring the mandatory rotation of registered public accounting firms.

(b) REPORT REQUIRED- Not later than 1 year after the date of enactment of this Act, the Comptroller General shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of the study and review required by this section.

(c) DEFINITION- For purposes of this section, the term ‘mandatory rotation’ refers to the imposition of a limit on the period of years in which a particular registered public accounting firm may be the auditor of record for a particular issuer.

SEC. 418. COMMISSION AUTHORITY.

(a) COMMISSION REGULATIONS- Not later than 180 days after the date of enactment of this Act, the Commission shall issue final regulations to carry out each of subsections (g) through (l) of section 10A of the Securities Exchange Act of 1934, as added by this title.

(b) AUDITOR INDEPENDENCE- It shall be unlawful for any registered public accounting firm (or an associated person thereof, as applicable) to prepare or issue any audit report with respect to any issuer, if the firm or associated person engages in any activity with respect to that issuer prohibited by any of subsections (g) through (l) of section 10A of the Securities Exchange Act of 1934, as added by this title, or any rule or regulation of the Commission or of the public regulatory organization established under section 421 issued thereunder.

SEC. 419. CONSIDERATIONS BY APPROPRIATE STATE REGULATORY AUTHORITIES.

It is the intention of this Act that, in supervising nonregistered public accounting firms and their associated persons, appropriate State regulatory authorities should make an independent determination of the proper standards applicable, particularly taking into consideration the size and nature of the business of the accounting firms they supervise. The standards applied by the public regulatory organization established under section 421 under this Act should not be presumed to be applicable for purposes of this section for small- and medium-sized nonregistered public accounting firms.

Chapter 2--Industry Oversight

SEC. 421. AUDITOR OVERSIGHT.

(a) CERTIFIED FINANCIAL STATEMENT REQUIREMENTS- If a financial statement is required by the securities laws or any rule or regulation thereunder to be certified by an independent public or certified accountant, an accountant shall not be considered to be qualified to certify such financial statement, and the Securities and Exchange Commission shall not accept a financial statement certified by an accountant, unless such accountant--

(1) is subject to a system of review by a public regulatory organization that complies with the requirements of this section and the rules prescribed by the Commission under this section; and

(2) has not been determined in the most recent review completed under such system to be not qualified to certify such a statement.

(b) ESTABLISHMENT OF PRO-

(1) ESTABLISHMENT REQUIRED- Not later than 90 days after the date of enactment of this section, the Commission shall establish a public regulatory organization to perform the duties set forth in this section.

(2) CHAIRMAN- The Chairman of the public regulatory organization shall be appointed by the Commission for a term of 5 years.

(3) APPOINTMENT OF PUBLIC REGULATORY ORGANIZATION MEMBERS- There shall be 6 additional public regulatory organization members, who shall be selected jointly by the Chairman of the public regulatory organization and the Chairman of the Commission.

(4) ACCOUNTANT MEMBERS- Up to 2 of the members may be present or former certified public accountants, provided such members--

(A) are not currently in public practices;

(B) have not been a person associated with a public accounting firm for a period of at least 3 years; and

(C) agree to not be a person associated with a public accounting firm or to receive consulting fees from a public accounting firm for a period of 5 years after leaving the public regulatory organization.

(5) NOMINATIONS- In making appointments of members, the Chairman of the public regulatory organization and the Chairman of the Commission shall consult with, and make appointments from nominations received from--

(A) institutional investors;

(B) public employee pension plans;

(C) pension plans organized pursuant to the Employee Retirement Income Security Act of 1974; and

(D) pension plans organized pursuant to the Taft-Hartley Act.

(6) TERMS- The members of the public regulatory organization shall have terms of 4 years, except that the Chairman of the public regulatory organization and the Chairman of the Commission shall adopt procedures for staggering the initial terms of the members first so appointed to provide for a reasonable overlapping of the terms of office of subsequently elected members.

(7) FULL-TIME BASIS- The members of the public regulatory organization shall serve on a full-time basis, severing all business ties with former firms or employers prior to beginning service on the public regulatory organization.

(8) RULES- Following selection of the initial members of the public regulatory organization, the public regulatory organization shall propose and adopt rules, which shall provide for--

(A) the operation and administration of the public regulatory organization, including the compensation of the members of the public regulatory organization, which shall be at a level comparable to similar professional positions in the private sector;

(B) the appointment and compensation of such employees, attorneys, and consultants as may be necessary or appropriate to carry out the public regulatory organization’s functions under this section;

(C) the registration of public accounting firms with the public regulatory organization pursuant to subsection (c); and

(D) the matters described in subsections (d) and (e).

(9) FUNDING OF THE PUBLIC REGULATORY ORGANIZATION-

(A) SELF-FINANCING- The public regulatory organization shall establish rules for the assessment and collection of fees sufficient to recover the costs and expenses of the public regulatory organization and to permit the public regulatory organization to operate on a self-financing basis.

(B) ASSESSMENT AND COLLECTION- The fees shall be assessed on issuers that file any financial statements, reports, or other documents with the Commission under the securities laws that must be certified by a public accounting firm. The fees shall be collected through the public accounting firm that certifies such statement, report, or document.

(C) PAYMENT A CONDITION OF REGISTRATION- The public regulatory organization shall terminate or suspend the registration under subsection (c) of any public accounting firm that fails to collect and transmit a fee assessed under this subsection.

(c) REGISTRATION WITH PUBLIC REGULATORY ORGANIZATION-

(1) REGISTRATION REQUIRED- Beginning 1 year after the date on which all initial members of the public regulatory organization have been selected in accordance with subsection (b), it shall be unlawful for a public accounting firm to furnish an accountant’s report on any financial statement, report, or other document required to be filed with the Commission under any Federal securities law, unless such firm is registered with the public regulatory organization.

(2) APPLICATION FOR REGISTRATION- A public accounting firm may be registered under this subsection by filing with the public regulatory organization an application for registration in such form and containing such information as the public regulatory organization, by rule, may prescribe. Each application shall include--

(A) the names of all clients of the public accounting firm for which the firm furnishes accountant’s reports on financial statements, reports, or other documents filed with the Commission;

(B) financial information of the public accounting firm for its most recent fiscal year, including its annual revenues from accounting and auditing services, its assets, and its liabilities;

(C) a statement of the public accounting firm’s policies and procedures with respect to quality control of its accounting and auditing practice;

(D) information relating to criminal, civil, or administrative actions or formal disciplinary proceedings pending against such firm, or any person associated with such firm, in connection with an accountant’s report furnished by such firm;

(E) a list of persons associated with the public accounting firm who are certified public accountants, including any State professional license or certification number for each such person; and

(F) such other information that is reasonably related to the public regulatory organization’s responsibilities as the public regulatory organization considers necessary or appropriate.

(3) PERIODIC REPORTS- Once in each year, or more frequently as the public regulatory organization, by rule, may prescribe, each public accounting firm registered with the public regulatory organization shall submit reports to the public regulatory organization updating the information contained in its application for registration and containing such additional information that is reasonably related to the public regulatory organization’s responsibilities as the public regulatory organization, by rule, may prescribe.

(4) EXEMPTIONS- The Commission, by rule or order, upon its own motion or upon application, may conditionally or unconditionally exempt any public accounting firm or any accountant’s report, or any class of public accounting firms or any class of accountant’s reports, from any provisions of this section or the rules or regulations issued hereunder, if the Commission finds that such exemption is consistent with the public interest, the protection of investors, and the purposes of this section.

(5) CONFIDENTIALITY- The public regulatory organization may, by rule, designate portions of the filings required pursuant to paragraphs (2) and (3) as privileged and confidential. This paragraph shall be considered to be a statute described in section 552(b)(3)(B) of title 5, United States Code, for purposes of that section 552.

(d) DUTIES REGARDING QUALITY CONTROL-

(1) OBJECTIVES; ATTAINMENT- The public regulatory organization shall seek to promote a high level of professional conduct among public accounting firms registered with the public regulatory organization, to improve the quality of audit services provided by such firms, and, in general, to protect investors and promote the public interest. The public regulatory organization shall attain these objectives--

(A) by establishing standards regarding the performance of financial audits in accordance with the requirements of paragraph (2);

(B) by the direct performance of quality reviews and inspections of audits in accordance with the requirements of paragraphs (3) and (4); and

(C) by the supervision and oversight of peer review organizations in accordance with the requirements of paragraph (5).

(2) AUDIT QUALITY STANDARDS-

(A) IN GENERAL- The public regulatory organization shall, by rule, establish quality standards applicable to the conduct of audit services provided by public accounting firms. Such standards shall include--

(i) independence standards;

(ii) quality control standards;

(iii) professional and ethical standards; and

(iv) such other standards as the public regulatory organization determines to be necessary to carry out the objectives specified in paragraph (1).

(B) SPECIFIC CONTENTS OF STANDARDS- In establishing the quality standards required by subparagraph (A), the public regulatory organization shall also establish--

(i) procedures for the monitoring by public accounting firms of their compliance with professional ethical standards established by the public regulatory organization, including its independence from its audit clients;

(ii) procedures for the assignment of personnel to audit engagements;

(iii) procedures for consultation within a public accounting firm or with other accountants relating to accounting and auditing questions;

(iv) procedures for the supervision of audit work;

(v) procedures for the review of decisions to accept and retain audit clients;

(vi) procedures for the internal inspection of the public accounting firms own compliance with such policies and procedures;

(vii) requirements for public accounting firms to prepare and maintain for a period of no less than 7 years, audit work papers and other information related to any audit report, in sufficient detail to support the conclusions reached in an audit report issued by a public accounting firm; and

(viii) procedures establishing ‘concurring’ or ‘second’ partner review systems for the evaluation and review of audit work by a partner that is not in charge of the conduct of the audit.

(3) DIRECT REVIEWS OF PUBLIC ACCOUNTING FIRMS- The public regulatory organization shall, by rule, establish procedures for the conduct of a continuing program of inspections of each public accounting firm registered with the public regulatory organization to assess compliance by such firm, and by persons associated with such firm, with applicable provisions of this title, the securities laws, the rules and regulations thereunder, the rules adopted by the public regulatory organization, and professional standards. Except as provided in paragraph (5), the public regulatory organization shall annually inspect each public accounting firm that audits more than 100 issuers on an ongoing annual basis, to the extent practicable, and all other public accounting firms no less than at least once every 3 years. In conducting such inspections, the public regulatory organization shall, among other things, inspect selected audit and review engagements. The review shall include evaluations of the firm’s quality control procedures and compliance with all legal and ethical requirements. In connection with each review, the public regulatory organization shall prepare a report of its findings and such report, accompanied by any letter of comments by the public regulatory organization or reviewer and any letter of response from the firm under review, shall be made available to the public. The public regulatory organization shall take any appropriate disciplinary or remedial action based on its findings after completion of such review and an opportunity for a hearing.

(4) QUALITY REVIEW OF INDIVIDUAL AUDITS- The public regulatory organization shall, by rule, establish procedures for the conduct of direct inspection and review of individual audits of issuers and standards under which it will evaluate audit service quality. A finding by the public regulatory organization that an individual audit of an issuer did or did not meet the standards of the public regulatory organization with respect to the quality of the audit shall not be construed in any action arising out of the securities laws as indicative of compliance or noncompliance with the securities laws or with any standard of liability arising thereunder.

(5) USE OF PROFESSIONAL PEER REVIEW ORGANIZATIONS-

(A) OPTION TO UTILIZE PEER REVIEW ORGANIZATIONS- The public regulatory organization may, by rule, establish requirements for the use of peer review organizations for the purposes of conducting the continuing program of inspections to assess compliance as required by paragraph (3) of each public accounting firm registered with the public regulatory organization. Such rule shall provide for appropriate oversight and supervision of such peer review organization by the public regulatory organization to ensure that such inspections meet the requirements of such paragraph.

(B) PENALTIES- If the public regulatory organization establishes requirements for the conduct of peer reviews under subparagraph (A), the violation by a public accounting firm or a person associated with such a firm of a rule of the peer review organization to which the firm belongs shall constitute grounds for--

(i) the imposition of disciplinary sanctions by the public regulatory organization pursuant to subsection (e); and

(ii) denial to the public accounting firm or person associated with such firm of the privilege of appearing or practicing before the Commission.

(6) CONFIDENTIALITY- Except as otherwise provided by this section, all reports, memoranda, and other information provided to the public regulatory organization solely for purposes of paragraph (3) or (4), or to a peer review organization certified by the public regulatory organization, shall be confidential, unless such confidentiality is expressly waived by the person or entity that created or provided the information.

(e) DISCIPLINARY DUTIES OF PUBLIC REGULATORY ORGANIZATION- The public regulatory organization shall have the following duties and powers:

(1) INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS- The public regulatory organization shall establish fair procedures for investigating and disciplining public accounting firms registered with the public regulatory organization, and persons associated with such firms, for violations of the Federal securities laws, the rules or regulations issued thereunder, the rules adopted by the public regulatory organization, or professional standards in connection with the preparation of an accountant’s report on a financial statement, report, or other document filed with the Commission.

(2) INVESTIGATION PROCEDURES-

(A) IN GENERAL- The public regulatory organization may conduct an investigation of any act, practice, or omission by a public accounting firm registered with the public regulatory organization, or by any person associated with such firm, in connection with the preparation of an accountant’s report on a financial statement, report, or other document filed with the Commission that may violate any applicable provision of the Federal securities laws, the rules and regulations issued thereunder, the rules adopted by the public regulatory organization, or professional standards, whether such act, practice, or omission is the subject of a criminal, civil, or administrative action, or a disciplinary proceeding, or otherwise is brought to the attention of the public regulatory organization.

(B) POWERS OF PUBLIC REGULATORY ORGANIZATION- For purposes of an investigation under this paragraph, the public regulatory organization may, in addition to such other actions as the public regulatory organization determines to be necessary or appropriate--

(i) require the testimony of any person associated with a public accounting firm registered with the public regulatory organization, with respect to any matter which the public regulatory organization considers relevant or material to the investigation;

(ii) require the production of audit workpapers and any other document or information in the possession of a public accounting firm registered with the public regulatory organization, or any person associated with such firm, wherever domiciled, that the public regulatory organization considers relevant or material to the investigation, and may examine the books and records of such firm to verify the accuracy of any documents or information so supplied; and

(iii) request the testimony of any person and the production of any document in the possession of any person, including a client of a public accounting firm registered with the public regulatory organization, that the public regulatory organization considers relevant or material to the investigation.

(C) SUSPENSION OR REVOCATION OF REGISTRATION FOR NONCOMPLIANCE- The refusal of any person associated with a public accounting firm registered with the public regulatory organization to testify, or the refusal of any such person to produce documents or otherwise cooperate with the public regulatory organization, in connection with an investigation or hearing under this section, shall be cause for suspending or barring such person from associating with a public accounting firm registered with the public regulatory organization, or such other appropriate sanction authorized by paragraph (3)(B) as the public regulatory organization shall determine. The refusal of any public accounting firm registered with the public regulatory organization to produce documents or otherwise cooperate with the public regulatory organization, in connection with an investigation or hearing under this section, shall be cause for the suspension or revocation of the registration of such firm, or such other appropriate sanction authorized by paragraph (3)(B) as the public regulatory organization shall determine.

(D) REFERRAL TO COMMISSION-

(i) IN GENERAL- If the public regulatory organization is unable to conduct or complete an investigation or hearing under this section because of the refusal of any client of a public accounting firm registered with the public regulatory organization, or any other person, to testify, produce documents, or otherwise cooperate with the public regulatory organization in connection with such investigation, the public regulatory organization shall report such refusal to the Commission.

(ii) INVESTIGATION- The Commission may designate the public regulatory organization or one or more officers of the public regulatory organization who shall be empowered, in accordance with such procedures as the Commission may adopt, to subpoena witnesses, compel their attendance, and require the production of any books, papers, correspondence, memoranda, or other records relevant to any investigation by the public regulatory organization. Attendance of witnesses and the production of any records may be required from any place in the United States or any State at any designated place of hearing. Enforcement of a subpoena issued by the public regulatory organization, or an officer of the public regulatory organization, pursuant to this subparagraph shall occur in the manner provided for in section 21(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(c)). Examination of witnesses subpoenaed pursuant to this subparagraph shall be conducted before an officer authorized to administer oaths by the laws of the United States or of the place where the examination is held.

(iii) REFERRALS TO COMMISSION- The public regulatory organization may refer any investigation to the Commission, as the public regulatory organization deems appropriate.

(E) IMMUNITY FROM CIVIL LIABILITY- An employee of the public regulatory organization engaged in carrying out an investigation or disciplinary proceeding under this section shall be immune from any civil liability arising out of such investigation or disciplinary proceeding in the same manner and to the same extent as an employee of the Federal Government in similar circumstances.

(3) DISCIPLINARY PROCEDURES-

(A) DECISION TO DISCIPLINE- In a proceeding by the public regulatory organization to determine whether a public accounting firm, or a person associated with such firm, should be disciplined, the public regulatory organization shall bring specific charges, notify such firm or person of the charges, give such firm or person an opportunity to defend against such charges, and keep a record of such actions.

(B) SANCTIONS- If the public regulatory organization, after conducting a review and providing an opportunity for a hearing, finds that a public accounting firm, or a person associated with such firm, has engaged in any act, practice, or omission in violation of the Federal securities laws, the rules or regulations issued thereunder, the rules adopted by the public regulatory organization, or professional standards, the public regulatory organization may impose such disciplinary sanctions as it deems appropriate, including--

(i) temporary or permanent revocation or suspension of registration under this section;

(ii) limitation of activities, functions, and operations;

(iii) fine;

(iv) censure;

(v) in the case of a person associated with a public accounting firm, suspension or bar from being associated with a public accounting firm registered with the public regulatory organization; and

(vi) any such other disciplinary sanction or remedial action as the public regulatory organization has established by rule that the public regulatory organization determines to be appropriate to prevent the recurrence of the violation.

(C) STATEMENT REQUIRED- A determination by the public regulatory organization to impose a disciplinary sanction shall be supported by a written statement by the public regulatory organization that shall be made available to the public and that sets forth--

(i) any act or practice in which the public accounting firm or person associated with such firm has been found to have engaged, or which such firm or person has been found to have omitted;

(ii) the specific provision of the Federal securities laws, the rules or regulations issued thereunder, the rules adopted by the public regulatory organization, or professional standards which any such act, practice, or omission is deemed to violate; and

(iii) the sanction imposed and the reasons therefor.

(D) PROHIBITION ON ASSOCIATION- It shall be unlawful--

(i) for any person as to whom a suspension or bar is in effect willfully to be or to become associated with a public accounting firm registered with the public regulatory organization, in connection with the preparation of an accountant’s report on any financial statement, report, or other document filed with the Commission, without the consent of the public regulatory organization or the Commission; and

(ii) for any public accounting firm registered with the public regulatory organization to permit such a person to become, or remain, associated with such firm without the consent of the public regulatory organization or the Commission, if such firm knew or, in the exercise of reasonable care should have known, of such suspension or bar.

(4) REPORTING OF SANCTIONS- If the public regulatory organization imposes a disciplinary sanction against a public accounting firm, or a person associated with such firm, the public regulatory organization shall report such sanction to the Commission, to the appropriate State or foreign licensing public regulatory organization or public regulatory organizations with which such firm or such person is licensed or certified to practice public accounting, and to the public. The information reported shall include--

(A) the name of the public accounting firm, or person associated with such firm, against whom the sanction is imposed;

(B) a description of the acts, practices, or omissions upon which the sanction is based;

(C) the nature of the sanction; and

(D) such other information respecting the circumstances of the disciplinary action (including the name of any client of such firm affected by such acts, practices, or omissions) as the public regulatory organization deems appropriate.

(5) DISCOVERY AND ADMISSIBILITY OF PUBLIC REGULATORY ORGANIZATION MATERIAL-

(A) DISCOVERABILITY-

(i) IN GENERAL- Except as provided in subparagraph (C), all reports, memoranda, and other information prepared, collected, or received by the public regulatory organization, and the deliberations and other proceedings of the public regulatory organization and its employees and agents in connection with an investigation

or disciplinary proceeding under this section shall not be subject to any form of civil discovery, including demands for production of documents and for testimony of individuals, in connection with any proceeding in any State or Federal court, or before any State or Federal administrative agency. This subparagraph shall not apply to any information provided to the public regulatory organization that would have been subject to discovery from the person or entity that provided it to the public regulatory organization, but is no longer available from that person or entity.

(ii) EXEMPTION- Submissions to the public regulatory organization by or on behalf of a public accounting firm or person associated with such a firm or on behalf of any other participant in a public regulatory organization proceeding (other than a public hearing), including documents generated by the public regulatory organization itself, shall be exempt from discovery to the same extent as the material described in clause (i), whether in the possession of the public regulatory organization or any other person, if such submission--

(I) is prepared specifically for the purpose of the public regulatory organization proceeding; and

(II) addresses the merits of the issues under investigation by the public regulatory organization.

(iii) HEARINGS PUBLIC- Except as otherwise ordered by the public regulatory organization on its own motion or on the motion of a party, all hearings under this paragraph shall be open to the public.

(B) ADMISSIBILITY-

(i) IN GENERAL- Except as provided in subparagraph (C), all reports, memoranda, and other information prepared, collected, or received by the public regulatory organization, the deliberations and other proceedings of the public regulatory organization and its employees and agents in connection with an investigation or disciplinary proceeding under this section, the fact that an investigation or disciplinary proceeding has been commenced, and the public regulatory organization’s determination with respect to any investigation or disciplinary proceeding shall be inadmissible in any proceeding in any State or Federal court or before any State or Federal administrative agency.

(ii) TREATMENT OF CERTAIN DOCUMENTS- Submissions to the public regulatory organization by or on behalf of a public accounting firm or person associated with such a firm or on behalf of any other participant in a public regulatory organization proceeding, including documents generated by the public regulatory organization itself, shall be inadmissible to the same extent as the material described in clause (i), if such submission--

(I) is prepared specifically for the purpose of the public regulatory organization proceedings; and

(II) addresses the merits of the issues under investigation by the public regulatory organization.

(C) AVAILABILITY AND ADMISSIBILITY OF INFORMATION-

(i) IN GENERAL- All information referred to in subparagraphs (A) and (B) shall be--

(I) available to the Commission;

(II) available to any other Federal department or agency in connection with the exercise of its regulatory authority to the extent that such information would be available to such agency from the Commission as a result of a Commission enforcement investigation;

(III) available to Federal and State authorities in connection with any criminal investigation or proceeding;

(IV) admissible in any action brought by the Commission or any other Federal department or agency pursuant to its regulatory authority, to the extent that such information would be available to such agency from the Commission as a result of a Commission enforcement investigation and in any criminal action; and

(V) available to State licensing public regulatory organizations to the extent authorized in paragraph (6).

(ii) OTHER LIMITATIONS- Any documents or other information provided to the Commission or other authorities pursuant to clause (i) shall be subject to the limitations on discovery and admissibility set forth in subparagraphs (A) and (B).

(6) PARTICIPATION BY STATE LICENSING PUBLIC REGULATORY ORGANIZATIONS-

(A) NOTICE- When the public regulatory organization institutes an investigation pursuant to paragraph (2)(A), it shall notify the State licensing public regulatory organizations in the States in which the public accounting firm or person associated with such firm engaged in the act or failure to act alleged to have violated professional standards, of the pendency of the investigation, and shall invite the State licensing public regulatory organizations to participate in the investigation.

(B) ACCEPTANCE BY STATE PUBLIC REGULATORY ORGANIZATION- If a State licensing public regulatory organization elects to join in the investigation, its representatives shall participate, pursuant to rules established by the public regulatory organization, in investigating the matter and in presenting the evidence justifying the charges in any hearing pursuant to paragraph (3)(A).

(C) STATE SANCTIONS PERMITTED- If the public regulatory organization or the Commission imposes a sanction upon a public accounting firm or person associated with such a firm, and that determination either is not subjected to judicial review or is upheld on judicial review, a State licensing public regulatory organization may impose a sanction on the basis of the public regulatory organization’s report pursuant to paragraph (4). Any sanction imposed by the State licensing public regulatory organization under this clause shall be inadmissible in any proceeding in any State or Federal court or before any State or Federal administrative agency.

(f) REVIEW AND APPROVAL OF RULES-

(1) SUBMISSION, PUBLICATION, AND COMMENT- Each recognized public regulatory organization shall file with the Commission, in accordance

with such rules as the Commission may prescribe, copies of any proposed rule or any proposed change in, addition to, or deletion from the rules of such recognized public regulatory organization (hereinafter in this subsection collectively referred to as a ‘proposed rule change’) accompanied by a concise general statement of the basis and purpose of such proposed rule change. The Commission shall, upon the filing of any proposed rule change, publish notice thereof together with the terms of substance of the proposed rule change or a description of the subjects and issues involved. The Commission shall give interested persons an opportunity to submit written data, views, and arguments concerning such proposed rule change. No proposed rule change shall take effect unless approved by the Commission or otherwise permitted in accordance with the provisions of this subsection.

(2) APPROVAL OR PROCEEDINGS- Within 35 days of the date of publication of notice of the filing of a proposed rule change in accordance with paragraph (1) of this subsection, or within such longer period as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the recognized public regulatory organization consents, the Commission shall--

(A) by order approve such proposed rule change; or

(B) institute proceedings to determine whether the proposed rule change should be disapproved. Such proceedings shall include notice of the grounds for disapproval under consideration and opportunity for hearing and be concluded within 180 days of the date of publication of notice of the filing of the proposed rule change. At the conclusion of such proceedings the Commission, by order, shall approve or disapprove such proposed rule change. The Commission may extend the time for conclusion of such proceedings for up to 60 days if it finds good cause for such extension and publishes its reasons for so finding or for such longer period as to which the recognized public regulatory organization consents.

(3) BASIS FOR APPROVAL OR DISAPPROVAL- The Commission shall approve a proposed rule change of a recognized public regulatory organization if it finds that such proposed rule change is consistent with the requirements of this title and the rules and regulations thereunder applicable to such organization. The Commission shall disapprove a proposed rule change of a recognized public regulatory organization if it does not make such finding. The Commission shall not approve any proposed rule change prior to the 30th day after the date of publication of notice of the filing thereof, unless the Commission finds good cause for so doing and publishes its reasons for so finding.

(4) RULES EFFECTIVE UPON FILING-

(A) Notwithstanding the provisions of paragraph (2) of this subsection, a proposed rule change may take effect upon filing with the Commission if designated by the recognized public regulatory organization as (i) constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule of the recognized public regulatory organization, (ii) establishing or changing a due, fee, or other charge imposed by the recognized public regulatory organization, or (iii) concerned solely with the administration of the recognized public regulatory organization or other matters which the Commission, by rule, consistent with the public interest and the purposes of this subsection, may specify as outside the provisions of such paragraph (2).

(B) Notwithstanding any other provision of this subsection, a proposed rule change may be put into effect summarily if it appears to the Commission that such action is necessary for the protection of investors, or otherwise in accordance with the purposes of this title. Any proposed rule change so put into effect shall be filed promptly thereafter in accordance with the provisions of paragraph (1) of this subsection.

(C) Any proposed rule change of a recognized public regulatory organization which has taken effect pursuant to subparagraph (A) or (B) of this paragraph may be enforced by such organization to the extent it is not inconsistent with the provisions of this title, the securities laws, the rules and regulations thereunder, and applicable Federal and State law. At any time within 60 days of the date of filing of such a proposed rule change in accordance with the provisions of paragraph (1) of this subsection, the Commission summarily may abrogate the change in the rules of the recognized public regulatory organization made thereby and require that the proposed rule change be refiled in accordance with the provisions of paragraph (1) of this subsection and reviewed in accordance with the provisions of paragraph (2) of this subsection, if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title. Commission action pursuant to the preceding sentence shall not affect the validity or force of the rule change during the period it was in effect, shall not be subject to court review, and shall not be deemed to be ‘final agency action’ for purposes of section 704 of title 5, United States Code.

(g) COMMISSION ACTION TO CHANGE RULES- The Commission, by rule, may abrogate, add to, and delete from (hereinafter in this subsection collectively referred to as ‘amend’) the rules of a recognized public regulatory organization as the Commission deems necessary or appropriate to insure the fair administration of the recognized public regulatory organization, to conform its rules to requirements of this title, the securities laws, and the rules and regulations thereunder applicable to such organization, or otherwise in furtherance of the purposes of this title, in the following manner:

(1) The Commission shall notify the recognized public regulatory organization and publish notice of the proposed rulemaking in the Federal Register. The notice shall include the text of the proposed amendment to the rules of the recognized public regulatory organization and a statement of the Commission’s reasons, including any pertinent facts, for commencing such proposed rulemaking.

(2) The Commission shall give interested persons an opportunity for the oral presentation of data, views, and arguments, in addition to an opportunity to make written submissions. A transcript shall be kept of any oral presentation.

(3) A rule adopted pursuant to this subsection shall incorporate the text of the amendment to the rules of the recognized public regulatory organization and a statement of the Commission’s basis for and purpose in so amending such rules. This statement shall include an identification of any facts on which the Commission considers its determination so to amend the rules of the recognized public regulatory agency to be based, including the reasons for

the Commission’s conclusions as to any of such facts which were disputed in the rulemaking.

(4)(A) Except as provided in paragraphs (1) through (3) of this subsection, rulemaking under this subsection shall be in accordance with the procedures specified in section 553 of title 5, United States Code, for rulemaking not on the record.

(B) Nothing in this subsection shall be construed to impair or limit the Commission’s power to make, or to modify or alter the procedures the Commission may follow in making, rules and regulations pursuant to any other authority under the securities laws.

(C) Any amendment to the rules of a recognized public regulatory organization made by the Commission pursuant to this subsection shall be considered for all purposes to be part of the rules of such recognized public regulatory organization and shall not be considered to be a rule of the Commission.

(h) COMMISSION OVERSIGHT OF THE PRO-

(1) RECORDS AND EXAMINATIONS- A public regulatory organization shall make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title or the securities laws.

(2) ADDITIONAL DUTIES; SPECIAL REVIEWS- A public regulatory organization shall perform such other duties or functions as the Commission, by rule or order, determines are necessary or appropriate in the public interest or for the protection of investors and to carry out the purposes of this title and the securities laws, including conducting a special review of a particular public accounting firm’s quality control system or a special review of a particular aspect of some or all public accounting firms’ quality control systems.

(3) ANNUAL REPORT; PROPOSED BUDGET-

(A) SUBMISSION OF ANNUAL REPORT AND BUDGET- A public regulatory organization shall submit an annual report and its proposed budget to the Commission for review and approval, by order, at such times and in such form as the Commission shall prescribe.

(i) a detailed description of the activities of the public regulatory organization;

(ii) the audited financial statements of the public regulatory organization;

(iii) a detailed explanation of the fees and charges imposed by the public regulatory organization under subsection (b)(9); and

(iv) such other matters as the public regulatory organization or the Commission deems appropriate.

(C) TRANSMITTAL OF ANNUAL REPORT TO CONGRESS- The Commission shall transmit each approved annual report received under subparagraph (A) to the Committee on Financial Services of the United States House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the United States Senate. At the same time it transmits a public regulatory organization’s annual report under this subparagraph, the Commission shall include a written statement of its views of the functioning and operations of the public regulatory organization.

(D) PUBLIC AVAILABILITY- Following transmittal of each approved annual report under subparagraph (C), the Commission and the public regulatory organization shall make the approved annual report publicly available.

(4) DISAPPROVAL OF ELECTION OF PRO MEMBER- The Commission is authorized, by order, if in its opinion such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title or the securities laws, to disapprove the election of any member of a public regulatory organization if the Commission determines, after notice and opportunity for hearing, that the person elected is unfit to serve on the public regulatory organization.

(i) CLARIFICATION OF APPLICATION OF PRO AUTHORITY- The authority granted to any such organization in this section shall only apply to the actions of accountants related to the certification of financial statements required by securities laws and not other actions or actions for other clients of the accounting firm or any accountant that does not certify financial statements for publicly traded companies.

(j) DEADLINE FOR RULEMAKING- The Commission shall--

(1) within 90 days after the date of enactment of this Act, propose, and

(2) within 270 days after such date, prescribe,

rules to implement this section.

(k) EFFECTIVE DATE; TRANSITION PROVISIONS-

(1) EFFECTIVE DATE- Except as provided in paragraph (2), subsection (a) of this section shall be effective with respect to any certified financial statement for any fiscal year that ends more than one year after the Commission recognizes a public regulatory organization pursuant to this section.

(2) DELAY IN ESTABLISHMENT OF BOARD- If the Commission has failed to recognize any public regulatory organization pursuant to this section within one year after the date of enactment of this Act, the Commission shall perform the duties of such organization with respect to any certified financial statement for any fiscal year that ends before one year after any such board is recognized by the Commission.

SEC. 422. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.

(a) RULES TO PROHIBIT- It shall be unlawful in contravention of such rules or regulations as the Commission shall prescribe as necessary and appropriate in the public interest or for the protection of investors for any

officer, director, or affiliated person of an issuer of any security registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of such issuer for the purpose of rendering such financial statements materially misleading. In any civil proceeding, the Commission shall have exclusive authority to enforce this section and any rule or regulation hereunder.

(b) NO PREEMPTION OF OTHER LAW- The provisions of subsection (a) shall be in addition to, and shall not supersede or preempt, any other provision of law or any rule or regulation thereunder.

(c) DEADLINE FOR RULEMAKING- The Commission shall--

(1) within 90 days after the date of enactment of this Act, propose, and

(2) within 270 days after such date, prescribe,

the rules or regulations required by this section.

SEC. 423. ENHANCED OVERSIGHT OF PERIODIC DISCLOSURES BY ISSUERS.

(a) REGULAR AND SYSTEMATIC REVIEW- The Securities and Exchange Commission shall review disclosures made by issuers pursuant to the Securities Exchange Act of 1934 (including reports filed on form 10-K) on a basis that is more regular and systematic than that in practice on the date of enactment on this Act. Such review shall include a review of an issuer’s financial statements.

(b) RISK RATING SYSTEM- For purposes of the reviews required by subsection (a), the Commission shall establish a risk rating system whereby issuers receive a risk rating by the Commission, which shall be used to determine the frequency of such reviews. In designing such a risk rating system the Commission shall consider, among other factors the following:

(4) Systemic factors such as the effect on niche markets or important subsectors of the economy.

(5) Issuers that experience significant volatility in their stock price as compared to other issuers.

(6) Any other factor the Commission may consider relevant.

(c) MINIMUM REVIEW PERIOD- In no event shall an issuer be reviewed less than once every three years by the Commission.

(d) PROHIBITION OF DISCLOSURE OF RISK RATING- Notwithstanding any other provision of law, the Commission shall not disclose the risk rating of any issuer described in subsection (b).

SEC. 424. RETENTION OF RECORDS.

(a) DUTY TO RETAIN RECORDS- Any independent public or certified accountant who certifies a financial statement as required by the securities laws or any rule or regulation thereunder shall prepare and maintain for a period of no less than 7 years, final audit work papers and other information related to any accountants report on such financial statements in sufficient detail to support the opinion or assertion reached in such accountants report. The Commission may prescribe rules specifying the application and requirements of this section.

(b) ACCOUNTANT’S REPORT- For purposes of subsection (a), the term ‘accountant’s report’ means a document in which an accountant identifies a financial statement and sets forth his opinion regarding such financial statement or an assertion that an opinion cannot be expressed.

SEC. 425. AUTHORIZATION OF APPROPRIATIONS OF THE SECURITIES AND EXCHANGE COMMISSION.

In addition to any other funds authorized to be appropriated to the Securities and Exchange Commission, there are authorized to be appropriated to carry out the functions, powers, and duties of the Commission, $776,000,000 for fiscal year 2003, of which--

(1) not less that $134,000,000 shall be available for the Division of Corporate Finance and for the Office of Chief Accountant;

(2) not less than $326,000,000 shall be available for the Division of Enforcement; and

(3) not less than $76,000,000 shall be available to implement section 8 of the Investor and Capital Markets Fee Relief Act, relating to pay comparability.

SEC. 426. ENFORCEMENT OF AUDIT COMMITTEE GOVERNANCE PRACTICES.

The Commission shall revise its regulations pertaining to auditor independence to require that an accountant shall not be considered to be independent for purposes of certifying the financial statements or other documents of an issuer required to be filed with the Commission under the securities laws unless--

(1) an issuer’s auditor is appointed by and reports directly to the audit committee of the board of directors or, in the absence of an audit committee, the board committee performing equivalent functions or the entire board of directors;

(2) the audit committee meets with the accountants engaged to perform such audit on a regular basis, at least quarterly; and

(3) the audit committee is provided with the opportunity to meet with such accountants without the attendance at such meetings of any officer, director, or other member of the issuer’s senior management.

SEC. 427. REVIEW OF CORPORATE GOVERNANCE PRACTICES.

(a) STUDY OF CORPORATE PRACTICES- The Commission shall conduct a study and review of current corporate governance standards and practices to determine whether such standards and practices are serving the best interests of shareholders. Such study and review shall include an analysis of--

(1) whether current standards and practices promote full disclosure of relevant information to shareholders;

(2) whether corporate codes of ethics are adequate to protect shareholders, and to what extent deviations from such codes are tolerated;

(3) to what extent conflicts of interests are aggressively reviewed, and whether adequate means for redressing such conflicts exist;

(4) to what extent sufficient legal protections exist or should be adopted to ensure that any manager who attempts to manipulate or unduly influence an audit will be subject to appropriate sanction and liability, including liability to investors or shareholders pursuing a private cause of action for such manipulation or undue influence;

(6) whether rules, standards, and practices relating to the independence of directors serving on audit committees are uniformly applied and adequate to protect investor interests; and

(7) what further or additional practices or standards might best protect investors and promote the interests of shareholders.

(b) PARTICIPATION OF STATE REGULATORS- In conducting the study required under subsection (a), the Commission shall seek the views of the securities and corporate regulators of the various States.

(c) REPORT REQUIRED- The Commission shall submit a report on the analysis required under subsection (a) as a part of the Commission’s next annual report submitted after the date of enactment of this Act.

SEC. 428. STUDY OF ENFORCEMENT ACTIONS.

(a) STUDY REQUIRED- The Commission shall review and analyze all enforcement actions by the Commission involving violations of reporting requirements imposed under the securities laws, and restatements of financial statements, over the last five years to identify areas of reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management, such as revenue recognition and the accounting treatment of off-balance sheet special purpose entities.

(b) REPORT REQUIRED- The Commission shall report its findings to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate within 180 days of the date of enactment of this Act and shall use such findings to revise its rules and regulations, as necessary. The report shall include a discussion of regulatory or legislative steps that are recommended or that may be necessary to address concerns identified in the study.

SEC. 429. STUDY OF CREDIT RATING AGENCIES.

(a) STUDY REQUIRED- The Commission shall conduct a study of the role and function of credit rating agencies in the operation of the securities market. Such study shall examine--

(1) the role of the credit rating agencies in the evaluation of issuers of securities;

(2) the importance of that role to investors and the functioning of the securities markets;

(3) any impediments to the accurate appraisal by credit rating agencies of the financial resources and risks of issuers of securities;

(4) any measures which may be required to improve the dissemination of information concerning such resources and risks when credit rating agencies announce credit ratings;

(5) any barriers to entry into the business of acting as a credit rating agency, and any measures needed to remove such barriers; and

(6) any conflicts of interest in the operation of credit rating agencies and measures to prevent such conflicts or ameliorate the consequences of such conflicts.

(b) REPORT REQUIRED- The Commission shall submit a report on the analysis required by subsection (a) to the President, the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate within 180 days after the date of enactment of this Act. The report shall include a discussion of regulatory or legislative steps that are recommended or that may be necessary to address concerns identified in the study.

SEC. 430. STUDY OF INVESTMENT BANKS

(a) GAO STUDY- The Comptroller General shall conduct a study on whether investment banks and financial advisors assisted public companies in manipulating their earnings and obfuscating their true financial condition. The study should address the role of the investment banks--

(1) in the collapse of the Enron Corporation, including with respect to the design and implementation of derivatives transactions, transactions involving special purpose vehicles, and other financing arrangements that may have had the effect of altering the company’s reported financial statements in ways that obscured the true financial picture of the company;

(2) in the failure of Global Crossing, including with respect to transactions involving swaps of fiber optic cable capacity, in designing transactions that may have had the effect of altering the company’s reported financial statements in ways that obscured the true financial picture of the company; and

(3) generally, in creating and marketing transactions which may have been designed solely to enable companies to manipulate revenue streams, obtain loans, or move liabilities off balance sheets without altering the economic and business risks faced by the companies or any other mechanism to obscure a company’s financial picture.

(b) REPORT- The General Accounting Office shall report to the Congress within 180 days after the date of enactment of this Act on the results of the study required by this section. The report shall include a discussion of regulatory or legislative steps that are recommended or that may be necessary to address concerns identified in the study.

SEC. 431. STUDY OF MODEL RULES FOR ATTORNEYS OF ISSUERS.

(a) IN GENERAL- The Comptroller General shall conduct a study of the Model Rules of Professional Conduct promulgated by the American Bar Association and rules of professional conduct applicable to attorneys established by the Commission to determine--

are issuers required to file periodic disclosures under section 13 or 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o), as to the ethical responsibilities of such attorneys to--

(A) warn clients of possible fraudulent or illegal activities of such clients and possible consequences of such activities;

(B) disclose such fraudulent or illegal activities to appropriate regulatory or law enforcement authorities; and

(C) manage potential conflicts of interests with clients; and

(2) whether such rules provide sufficient protection to corporate shareholders, especially with regards to conflicts of interest between attorneys and their corporate clients.

(b) REPORT REQUIRED- The Comptroller General shall report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on the results of the study required by this section. Such report shall include any recommendations of the General Accounting Office with regards to--

(1) possible changes to the Model Rules and the rules of professional conduct applicable to attorneys established by the Commission to provide increased protection to shareholders;

(2) whether restrictions should be imposed to require that an attorney, having represented a corporation or having been employed by a firm which represented a corporation, may not be employed as general counsel to that corporation until a certain period of time has expired; and

(3) regulatory or legislative steps that are recommended or that may be necessary to address concerns identified in the study.

Subtitle C--General Provisions

SEC. 441. ENFORCEMENT AUTHORITY.

(a) REGULATORY ACTION- The Commission shall promulgate such rules and regulations, as may be necessary or appropriate in the public interest or for the protection of investors, and in furtherance of this title.

(b) ENFORCEMENT-

(1) IN GENERAL- A violation by any person of this title, any rule or regulation of the Commission issued under this title, or any rule of the public regulatory organization established under section 421, shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or the rules and regulations issued thereunder, consistent with the provisions of this title, and any such person shall be subject to the same penalties, and to the same extent, as for a violation of that Act or such rules or regulations.

(A) in subsection (a)(1), by inserting ‘the rules of the public regulatory organization established under section 421 of the Investors’ and Employees’ Bill of Rights Act of 2002, of which such person is a registered public accounting firm or a person associated with such a firm,’ after ‘is a participant,’;

(B) in subsection (d)(1), by inserting ‘the rules of the public regulatory organization established under section 421 of the Investors’ and Employees’ Bill of Rights Act of 2002, of which such person is a registered public accounting firm or a person associated with such a firm,’ after ‘is a participant,’;

(C) in subsection (e), by inserting ‘the rules of the public regulatory organization established under section 421 of the Investors’ and Employees’ Bill of Rights Act of 2002, of which such person is a registered public accounting firm or a person associated with such a firm,’ after ‘is a participant,’; and

(D) in subsection (f), by inserting ‘the public regulatory organization established under section 421 of the Investors’ and Employees’ Bill of Rights Act of 2002’ after ‘self-regulatory organization’ each place that term appears.

(c) EFFECT ON COMMISSION AUTHORITY- Nothing in this title or the rules of the public regulatory organization established under section 421 shall be construed to impair or limit--

(1) the authority of the Commission to regulate the accounting profession, accounting firms, or persons associated with such firms for purposes of enforcement of the securities laws;

(2) the authority of the Commission to set standards for accounting or auditing practices or auditor independence, derived from other provisions of the securities laws or the rules or regulations thereunder, for purposes of the preparation and issuance of any audit report, or otherwise under applicable law; or

(3) the ability of the Commission to take, on the initiative of the Commission, legal, administrative, or disciplinary action against any registered public accounting firm or any associated person thereof.

SEC. 442. EXCLUSION FOR INVESTMENT COMPANIES.

Sections 401, 402, 403, 405, and 421 of this title shall not apply to an investment company registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8).

SEC. 443. DEFINITIONS.

As used in this title:

(1) BLACKOUT PERIOD- The term ‘blackout period’ with respect to the equity securities of any issuer--

(A) means any period during which the ability of at least fifty percent of the participants or beneficiaries under all applicable individual account plans maintained by the issuer to purchase (or otherwise acquire) or sell (or otherwise transfer) an interest in any equity of such issuer is suspended by the issuer or a fiduciary of the plan; but

(B) does not include--

(i) a period in which the employees of an issuer may not allocate their interests in the individual account plan due to an express investment restriction--

(I) incorporated into the individual account plan; and

(II) timely disclosed to employees before joining the individual account plan or as a subsequent amendment to the plan; or

(ii) any suspension described in subparagraph (A) that is imposed solely in connection with persons becoming participants or beneficiaries, or ceasing to be participants or beneficiaries, in an applicable individual account plan by reason of a corporate merger, acquisition, divestiture, or similar transaction.

(2) BOARDS OF ACCOUNTANCY OF THE STATES- The term ‘boards of accountancy of the States’ means any organization or association chartered or approved under the law of any State with responsibility for the registration, supervision, or regulation of accountants.

(3) COMMISSION- The term ‘Commission’ means the Securities and Exchange Commission.

(4) INDIVIDUAL ACCOUNT PLAN- The term ‘individual account plan’ has the meaning provided such term in section 3(34) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002(34)).

(5) ISSUER- The term ‘issuer’ shall have the meaning set forth in section 2(a)(4) of the Securities Act of 1933 (15 U.S.C. 77b(a)(4)).

(6) PERSON ASSOCIATED WITH AN ACCOUNTANT- The term ‘person associated with an accountant’ means any partner, officer, director, or manager of such accountant (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such accountant, or any employee of such accountant who performs a supervisory role in the auditing process.

(7) PUBLIC REGULATORY ORGANIZATION- The term ‘public regulatory organization’ means the public regulatory organization established by the Commission under subsection (b) of section 421.

TITLE V--ENHANCING PENSION PROTECTION FOR EMPLOYEES

Subtitle A--Improvements in Disclosure

SEC. 501. PENSION BENEFIT INFORMATION.

(a) PENSION BENEFIT STATEMENTS REQUIRED ON PERIODIC BASIS-

(1) IN GENERAL- Subsection (a) of section 105 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1025) is amended--

(A) by striking ‘shall furnish to any plan participant or beneficiary who so requests in writing,’ and inserting ‘shall furnish at least once every 3 years, in the case of a participant in a defined benefit plan who has attained age 35, and annually, in the case of an individual account plan, to each plan participant, and shall furnish to any plan participant or beneficiary who so requests,’, and

(B) by adding at the end the following flush sentence:

‘Information furnished under the preceding sentence to a participant in a defined benefit plan (other than at the request of the participant) may be based on reasonable estimates determined under regulations prescribed by the Secretary.’.

(2) MODEL STATEMENT- Section 105 of such Act (29 U.S.C. 1025) is amended by adding at the end the following new subsection:

‘(e)(1) The Secretary of Labor shall develop a model benefit statement which shall be used by plan administrators in complying with the requirements of subsection (a). Such statement shall include--

‘(A) the amount of nonforfeitable accrued benefits as of the statement date which is payable at normal retirement age under the plan,

‘(B) the amount of accrued benefits which are forfeitable but which may become nonforfeitable under the terms of the plan,

‘(C) the amount or percentage of any reduction due to integration of the benefit with the participant’s Social Security benefits or similar governmental benefits,

‘(D) information on early retirement benefit and joint and survivor annuity reductions, and

‘(E) the percentage of the net return on investment of plan assets for the preceding plan year (or, with respect to investments directed by the participant, the net return on investment of plan assets for such year so directed), itemized with respect to each type of investment, and, stated separately, the administrative and transaction fees incurred in connection with each such type of investment, and

‘(F) in the case of an individual account plan, the amount and percentage of assets in the individual account that consists of employer securities

and employer real property (as defined in paragraphs (1) and (2), respectively, of section 407(d)), as determined as of the most recent valuation date of the plan.

‘(2) The Secretary shall also develop a separate notice, which shall be included by the plan administrator with the information furnished pursuant to subsection (a), which advises participants and beneficiaries of generally accepted investment principles, including principles of risk management and diversification for long-term retirement security and the risks of holding substantial assets in a single asset such as employer securities.’.

(3) RULE FOR MULTIEMPLOYER PLANS- Subsection (d) of section 105 of such Act (29 U.S.C. 1025) is amended to read as follows:

‘(d) Each administrator of a plan to which more than 1 unaffiliated employer is required to contribute shall furnish to any plan participant or beneficiary who so requests in writing, a statement described in subsection (a).’.

(b) DISCLOSURE OF BENEFIT CALCULATIONS-

(1) IN GENERAL- Section 105 of such Act (as amended by subsection (a)) is amended further--

‘(b)(1) In the case of a participant or beneficiary who is entitled to a distribution of a benefit under an employee pension benefit plan, the administrator of such plan shall provide to the participant or beneficiary the information described in paragraph (2) upon the written request of the participant or beneficiary.

‘(2) The information described in this paragraph includes--

‘(A) a worksheet explaining how the amount of the distribution was calculated and stating the assumptions used for such calculation,

‘(B) upon written request of the participant or beneficiary, any documents relating to the calculation (if available), and

‘(C) such other information as the Secretary may prescribe.

Any information provided under this paragraph shall be in a form calculated to be understood by the average plan participant.’.

(2) CONFORMING AMENDMENTS-

(A) Section 101(a)(2) of such Act (29 U.S.C. 1021(a)(2)) is amended by striking ‘105(a) and (c)’ and inserting ‘105(a), (b), and (d)’.

(B) Section 105(c) of such Act (as redesignated by paragraph (1)(A) of this subsection) is amended by inserting ‘or (b)’ after ‘subsection (a)’.

(1) EXCISE TAX ON FAILURE OF DEFINED CONTRIBUTION PLANS TO PROVIDE NOTICE OF GENERALLY ACCEPTED INVESTMENT PRINCIPLES- Chapter 43 of the Internal Revenue Code of 1986 (relating to qualified pension, etc., plans) is amended by adding at the end the following new section:

‘(a) IMPOSITION OF TAX- There is hereby imposed a tax on the failure of any defined contribution plan to meet the requirements of subsection (e) with respect to any participant or beneficiary.

‘(b) AMOUNT OF TAX- The amount of the tax imposed by subsection (a) on any failure with respect to any participant or beneficiary shall be $1,000 for each day on which such failure is not corrected.

‘(c) LIMITATIONS ON AMOUNT OF TAX-

‘(1) TAX NOT TO APPLY TO FAILURES CORRECTED AS SOON AS REASONABLY PRACTICABLE- No tax shall be imposed by subsection (a) on any failure if--

‘(A) any person subject to liability for the tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), and

‘(B) such person provides the notice described in subsection (e) as soon as reasonably practicable after the first date such person knew, or exercising reasonable diligence should have known, that such failure existed.

‘(2) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES-

‘(A) IN GENERAL- If the person subject to liability for tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), the tax imposed by subsection (a) for failures during the taxable year of the employer (or, in the case of a multiemployer plan, the taxable year of the trust forming part of the plan) shall not exceed $500,000. For purposes of the preceding sentence, all multiemployer plans of which the same trust forms a part shall be treated as 1 plan.

‘(B) TAXABLE YEARS IN THE CASE OF CERTAIN CONTROLLED GROUPS- For purposes of this paragraph, if all persons who are treated as a single employer for purposes of this section do not have the same taxable year, the taxable years taken into account shall be determined under principles similar to the principles of section 1561.

‘(3) WAIVER BY SECRETARY- In the case of a failure which is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the tax imposed by subsection (a) to the extent that the payment of such tax would be excessive or otherwise inequitable relative to the failure involved.

‘(d) LIABILITY FOR TAX- The following shall be liable for the tax imposed by subsection (a):

‘(1) In the case of a plan other than a multiemployer plan, the employer.

‘(2) In the case of a multiemployer plan, the plan.

‘(e) REQUIREMENTS RELATING TO NOTICE OF GENERALLY ACCEPTED INVESTMENT PRINCIPLES- The plan administrator of any defined contribution plan shall provide annually a separate notice which advises participants and beneficiaries of generally accepted investment principles, including principles of risk management and diversification for long-term retirement security and the risks of holding substantial assets in a single asset such as employer securities.’.

(2) CLERICAL AMENDMENT- The table of sections for chapter 43 of such Code is amended by adding at the end the following new item:

SEC. 502. IMMEDIATE WARNING OF EXCESSIVE STOCK HOLDINGS.

Section 105 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1025) (as amended by section 501 of this Act) is amended further by adding at the end the following new subsection:

‘(g)(1) Upon receipt of information by the plan administrator of an individual account plan indicating that the individual account of any participant which had not been excessively invested in employer securities is excessively invested in such securities (or that such account, as initially invested, is excessively invested in employer securities), the plan administrator shall immediately provide to the participant a separate, written statement--

‘(A) indicating that the participant’s account has become excessively invested in employer securities,

‘(B) setting forth the notice described in subsection (e)(7), and

‘(C) referring the participant to investment education materials and investment advice which shall be made available by or under the plan.

In any case in which such a separate, written statement is required to be provided to a participant under this paragraph, each statement issued to such participant pursuant to subsection (a) thereafter shall also contain such separate, written statement until the plan administrator is made aware that such participant’s account has ceased to be excessively invested in employer securities or the employee, in writing, waives the receipt of the notice and acknowledges understanding the importance of diversification.

‘(2) Each notice required under this subsection shall be provided in a form and manner which shall be prescribed in regulations of the Secretary. Such regulations shall provide for inclusion in the notice a prominent reference to the risks of large losses in assets available for retirement from excessive investment in employer securities.

‘(3) For purposes of paragraph (1), a participant’s account is ‘excessively invested’ in employer securities if more than 10 percent of the balance in such account is invested in employer securities (as defined in section 407(d)(1)).’.

SEC. 503. ADDITIONAL FIDUCIARY PROTECTIONS RELATING TO LOCKDOWNS.

(a) AMENDMENT TO EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974- Section 404 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104) is amended by adding at the end the following new subsection:

‘(e)(1) In the case of any eligible individual account plan (as defined in section 407(d)(3)) no lockdown may take effect until at least 30 days after written notice of such lockdown is provided by the plan administrator to such participant or beneficiary (and to each employee organization representing any such participant).

‘(2) Subject to such regulations as the Secretary may prescribe, the requirements of paragraph (1) shall not apply in cases of emergency.

‘(3) A plan described in paragraph (1) shall provide that each participant and beneficiary required to receive a notice under paragraph (1)(A) is entitled to direct the plan to divest within 3 business days (but in no event later than the beginning of the lockdown) any security or other property in which any assets allocated to the account of such individual are invested and to reinvest such assets in any other investment option offered under the plan.

‘(4) For purposes of this subsection, the term ‘lockdown’ means any temporary lockdown, blackout, or freeze with respect to, suspension of, or similar limitation on the ability of a participant or beneficiary to exercise control over the assets in his or her account as otherwise generally provided under the plan (as determined under regulations of the Secretary), including the ability to direct investments, obtain loans, or obtain distributions.’.

(b) AMENDMENTS TO INTERNAL REVENUE CODE OF 1986-

(1) EXCISE TAX ON FAILURES WITH RESPECT TO LOCKDOWNS- Chapter 43 of the Internal Revenue Code of 1986 (relating to qualified pension, etc., plans) is amended by adding at the end the following new section:

‘(a) IMPOSITION OF TAX- There is hereby imposed a tax on the failure of any defined contribution plan to meet the requirements of subsection (e) with respect to any participant or beneficiary.

‘(b) AMOUNT OF TAX- The amount of the tax imposed by subsection (a) on any failure with respect to any participant or beneficiary shall be $100.

‘(c) LIMITATIONS ON AMOUNT OF TAX-

‘(1) TAX NOT TO APPLY TO FAILURES CORRECTED AS SOON AS REASONABLY PRACTICABLE- No tax shall be imposed by subsection (a) on any failure if--

‘(A) any person subject to liability for the tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), and

‘(B) such person meets the requirements of subsection (e) as soon as reasonably practicable after the first date such person knew, or exercising reasonable diligence should have known, that such failure existed.

‘(2) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES-

‘(A) IN GENERAL- If the person subject to liability for tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), the tax imposed by subsection (a) for failures during the taxable year of the employer (or, in the case of a multiemployer plan, the taxable year of the trust forming part of the plan) shall not exceed $500,000. For purposes of the preceding sentence, all multiemployer plans of which the same trust forms a part shall be treated as 1 plan.

‘(B) TAXABLE YEARS IN THE CASE OF CERTAIN CONTROLLED GROUPS- For purposes of this paragraph, if all persons who are treated as a single employer for purposes of this section do not have the same taxable year, the taxable years taken into account shall be determined under principles similar to the principles of section 1561.

‘(3) WAIVER BY SECRETARY- In the case of a failure which is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the tax imposed by subsection (a) to the extent that the payment of such tax would be excessive or otherwise inequitable relative to the failure involved.

‘(d) LIABILITY FOR TAX- The following shall be liable for the tax imposed by subsection (a):

‘(1) In the case of a plan other than a multiemployer plan, the employer.

‘(2) In the case of a multiemployer plan, the plan.

‘(e) REQUIREMENTS RELATING TO LOCKDOWNS-

‘(1) IN GENERAL- In the case of any defined contribution plan no lockdown may take effect until at least 30 days after written notice of such lockdown is provided by the plan administrator to each participant or beneficiary (and to each employee organization representing any such participant).

‘(2) EXCEPTION FOR EMERGENCY- Subject to such regulations as the Secretary may prescribe, the requirements of paragraph (1) shall not apply in cases of emergency.

‘(3) REQUIREMENT RELATING TO DIVESTMENT- A plan described in paragraph (1) shall provide that each participant and beneficiary required to receive a notice under paragraph (1)(A) is entitled to direct the plan to divest within 3 business days (but in no event later than the beginning of the lockdown) any security or other property in which any assets allocated to the account of such individual are invested and to reinvest such assets in any other investment option offered under the plan.

‘(4) LOCKDOWN DEFINED- For purposes of this subsection, the term ‘lockdown’ means any temporary lockdown, blackout, or freeze with respect to, suspension of, or similar limitation on the ability of a participant or beneficiary to exercise control over the assets in his or her account as otherwise generally provided under the plan (as determined under regulations of the Secretary), including the ability to direct investments, obtain loans, or obtain distributions.’.

(2) CLERICAL AMENDMENT- The table of sections for chapter 43 of such Code is amended by adding at the end the following new item:

SEC. 504. REPORT TO PARTICIPANTS AND BENEFICIARIES OF TRADES IN EMPLOYER SECURITIES.

(a) IN GENERAL- Section 104 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1024) is amended--

(1) by redesignating subsection (d) as subsection (e); and

(2) by inserting after subsection (c) the following new subsection:

‘(d)(1) In any case in which assets in the individual account of a participant or beneficiary under an individual account plan include employer securities, if any person engages in a transaction constituting a direct or indirect purchase or sale of employer securities and--

‘(A) such transaction is required under section 16 of the Securities Exchange Act of 1934 to be reported by such person to the Securities and Exchange Commission, or

‘(B) such person is a named fiduciary of the plan,

such person shall comply with the requirements of paragraph (2).

‘(2) A person described in paragraph (1) complies with the requirements of this paragraph in connection with a transaction described in paragraph (1) if such person provides to the plan administrator of the plan a written notification of the transaction not later than 1 business day after the date of the transaction.

‘(3)(A) If the plan administrator is made aware, on the basis of notifications received pursuant to paragraph (2) or otherwise, that the proceeds from any transaction described in paragraph (1), constituting direct or indirect sales of employer securities by any person described in paragraph (1), exceed $100,000, the plan administrator of the plan shall provide to each participant and beneficiary a notification of such transaction. Such notification shall be in writing, except that such notification may be in electronic or other form to the extent that such form is reasonably accessible to the participant or beneficiary.

‘(B) In any case in which the proceeds from any transaction described in paragraph (1) (with respect to which a notification has not been provided pursuant to this paragraph), together with the proceeds from any other such transaction or transactions described in paragraph (1) occurring during the preceding one-year period, constituting direct or indirect sales of employer securities by any person described in paragraph (1), exceed (in the aggregate) $100,000, such series of transactions by such person shall be treated as a transaction described in subparagraph (A) by such person.

‘(C) Each notification required under this paragraph shall be provided as soon as practicable, but not later than 3 business days after receipt of the written notification or notifications indicating that the transaction (or series of transactions) requiring such notice has occurred.

‘(4) Each notification required under paragraph (2) or (3) shall be made in such form and manner as may be prescribed in regulations of the Secretary and shall include the number of shares involved in each transaction and the price per share, and the notification required under paragraph (3) shall be written in language designed to be understood by the average plan participant. The Secretary may provide by regulation, in consultation with the Securities and Exchange Commission, for exemptions from the requirements of this subsection with respect to specified types of transactions to the extent that such exemptions are consistent with the best interests of plan participants and beneficiaries. Such exemptions may relate to transactions involving reinvestment plans, stock splits, stock dividends, qualified domestic relations orders, and similar matters.

‘(5) For purposes of this subsection, the term ‘employer security’ has the meaning provided in section 407(d)(1).’.

(b) EFFECTIVE DATE- The amendments made by this section shall apply with respect to transactions occurring on or after October 1, 2002.

Section 404(c) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104(c)) is amended by adding at the end the following new paragraph:

‘(4) The plan sponsor and plan administrator of a pension plan described in paragraph (1) shall have a fiduciary duty to ensure that each participant and beneficiary under the plan, in connection with the investment by the participant or beneficiary of plan assets in the exercise of his or her control over assets in his account, is provided with all material investment information regarding investment of such assets to the extent that the provision of such information is generally required to be disclosed by the plan sponsor to investors in connection with such an investment under applicable securities laws. The provision by the plan sponsor or plan administrator of any misleading investment information shall be treated as a violation of this paragraph.’.

SEC. 506. ENFORCEMENT OF INFORMATION AND DISCLOSURE REQUIREMENTS.

(a) IN GENERAL- Section 502(c) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1132(c)) is amended--

(1) by redesignating paragraph (7) as paragraph (8); and

(2) by inserting after paragraph (6) the following new paragraph:

‘(7) The Secretary may assess a civil penalty against any person required to provide any notification under the provisions of section 104(d), any statement under the provisions of subsection (a), (d), or (f) of section 105, any information under the provisions of section 404(c)(4), or any notice under the provisions of section 404(f)(1) of up to $1,000 a day from the date of any failure by such person to provide such notification, statement, information, or notice in accordance with such provisions.’.

(b) CONFORMING AMENDMENT- Section 502(a)(6) of such Act (29 U.S.C. 1132(a)(6)) (as amended by section 502(b) of this Act) is amended further by striking ‘(5), or (6)’ and inserting ‘(5), (6), or (7)’.

Subtitle B--Diversification Requirements

SEC. 511. FREEDOM TO MAKE INVESTMENT DECISIONS WITH PLAN ASSETS.

(a) AMENDMENTS TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974- Section 404 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104) (as amended by section 503 of this Act) is amended further by adding at the end the following new subsection:

‘(f)(1)(A)(i) Subject to clause (ii), an individual account plan under which a participant or beneficiary is permitted to exercise control over assets in his or her account shall provide that--

‘(I) any such participant or beneficiary has the right to allocate all assets in his or her account (and any portion thereof) attributable to employee contributions to any investment option provided under the plan, and

‘(II) any such participant who has completed 3 years of service (as defined in section 203(b)(2)) with the employer, or any such beneficiary of such a participant, has the right to allocate all assets in his or her account (and any portion thereof) attributable to employer contributions to any investment option provided under the plan.

The application of any penalty or any restriction based on age or years of service in connection with any exercise of such right as provided under this clause shall be construed as a violation of this clause.

‘(ii) Clause (i) shall apply only to so much of a nonforfeitable accrued benefit as consists of employer securities which are readily tradable on an established securities market.

‘(B)(i) Except as provided in clause (ii), within 5 days after the date of any election by a participant or beneficiary allocating his or her nonforfeitable accrued benefit to any investment option provided under the plan, the plan administrator shall take such actions as are necessary to effectuate such allocation.

‘(ii) In any case in which the plan provides for elections periodically during prescribed periods, the 5-day period described in clause (i) shall commence at the end of each such prescribed period.

‘(C) Nothing in this paragraph shall be construed to limit the authority of a plan to impose limitations on the portion of plan assets in any account which may be invested in employer securities to the extent that any such limitation is consistent with this title and not more restrictive than is permitted under this title.

‘(2) Not later than 30 days prior to the date on which the right of a participant under an individual account plan to his or her accrued benefit becomes nonforfeitable, the plan administrator shall provide to such participant and his or her beneficiaries a written notice--

‘(A) setting forth their rights under this section with respect to the accrued benefit, and

‘(B) describing the importance of diversifying the investment of account assets.’.

(b) AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986-

(1) EXCISE TAX ON FAILURE TO PERMIT DIVERSIFICATION OF EMPLOYER SECURITIES- Chapter 43 of the Internal Revenue Code of 1986 (relating to qualified pension, etc., plans) is amended by adding at the end the following new section:

‘(a) IMPOSITION OF TAX- There is hereby imposed a tax on the failure of any defined contribution plan to meet the requirements of subsection (e) with respect to any participant or beneficiary.

‘(b) AMOUNT OF TAX- The amount of the tax imposed by subsection (a) on any failure with respect to any participant or beneficiary shall be $1,000 for each day for which the failure is not corrected.

‘(c) LIMITATIONS ON AMOUNT OF TAX-

‘(1) TAX NOT TO APPLY TO FAILURES CORRECTED AS SOON AS REASONABLY PRACTICABLE- No tax shall be imposed by subsection (a) on any failure if--

‘(A) any person subject to liability for the tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), and

‘(B) such person meets the requirements of subsection (e) as soon as reasonably practicable after the first date such person knew, or exercising reasonable diligence should have known, that such failure existed.

‘(2) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES-

‘(A) IN GENERAL- If the person subject to liability for tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), the tax imposed by subsection (a) for failures during the taxable year of the employer (or, in the case of a multiemployer plan, the taxable year of the trust forming part of the plan) shall not exceed $500,000. For purposes of the preceding sentence, all multiemployer plans of which the same trust forms a part shall be treated as 1 plan.

‘(B) TAXABLE YEARS IN THE CASE OF CERTAIN CONTROLLED GROUPS- For purposes of this paragraph, if all persons who are treated as a single employer for purposes of this section do not have the same taxable year, the taxable years taken into account shall be determined under principles similar to the principles of section 1561.

‘(3) WAIVER BY SECRETARY- In the case of a failure which is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the tax imposed by subsection (a) to the extent that the payment of such tax would be excessive or otherwise inequitable relative to the failure involved.

‘(d) LIABILITY FOR TAX- The following shall be liable for the tax imposed by subsection (a):

‘(1) In the case of a plan other than a multiemployer plan, the employer.

‘(2) In the case of a multiemployer plan, the plan.

‘(e) REQUIREMENTS RELATING TO DIVERSIFICATION OF EMPLOYER SECURITY-

‘(1) IN GENERAL- The requirements of this subsection are the requirements of paragraphs (2), (3), and (4).

‘(2) RIGHT TO DIRECT INVESTMENTS-

‘(A) IN GENERAL- Subject to subparagraph (B), a plan meets the requirements of this paragraph if, under the plan--

‘(i) any participant or beneficiary who is permitted to exercise control over assets in his or her account has the right to allocate all assets in his or her account (and any portion thereof) attributable to employee contributions to any investment option provided under the plan, and

‘(ii) any such participant who has completed 3 years of service (as defined in section 411(a)(5)) with the employer, or any such beneficiary of such a participant, has the right to allocate all assets in his or her account (and any portion thereof) attributable to employer contributions to any investment option provided under the plan.

The application of any penalty or any restriction based on age or years of service in connection with any exercise of such right as provided under this clause shall be construed as a violation of this clause.

‘(B) LIMITATION TO READILY TRADABLE EMPLOYER SECURITIES- Subparagraph (A) shall apply only to so much of a nonforfeitable accrued benefit as consists of employer securities which are readily tradable on an established securities market.

‘(3) PROMPT COMPLIANCE WITH DIRECTIONS TO ALLOCATE INVESTMENTS-

‘(A) IN GENERAL- Except as provided in subparagraph (B), a plan meets the requirements of this paragraph if the plan provides that, within 5 days after the date of any election by a participant or beneficiary allocating his or her nonforfeitable accrued benefit to any investment option provided under the plan, the plan administrator shall take such actions as are necessary to effectuate such allocation.

‘(B) SPECIAL RULE FOR PERIODIC ELECTIONS- In any case in which the plan provides for elections periodically during prescribed periods, the 5-day period described in subparagraph (A) shall commence at the end of each such prescribed period.

‘(4) NOTICE OF RIGHTS AND OF IMPORTANCE OF DIVERSIFICATION- A plan meets the requirements of this paragraph if the plan provides that, not later than 30 days prior to the date on which

the right of a participant under the plan to his or her accrued benefit becomes nonforfeitable, the plan administrator shall provide to such participant and his or her beneficiaries a written notice--

‘(A) setting forth their rights under this section with respect to the accrued benefit, and

‘(B) describing the importance of diversifying the investment of account assets.

‘(5) PRESERVATION OF AUTHORITY OF PLAN TO LIMIT INVESTMENT- Nothing in this subsection shall be construed to limit the authority of a plan to impose limitations on the portion of plan assets in any account which may be invested in employer securities.’.

(2) CLERICAL AMENDMENT- The table of sections for chapter 43 of such Code is amended by adding at the end the following new item:

(c) RECOMMENDATIONS RELATING TO NON-PUBLICLY TRADED STOCK- Within 1 year after the date of the enactment of this Act, the Secretary of Labor and the Secretary of the Treasury shall jointly transmit to the Committee on Education and the Workforce and the Committee on Ways and Means of the House of Representatives and the Committee on Health, Education, Labor, and Pensions and the Committee on Finance of the Senate their recommendations regarding legislative changes relating to treatment, under section 404(e) of the Employee Retirement Income Security Act of 1974 and section 401(a)(35) of the Internal Revenue Code of 1986 (as added by this section), of individual account plans under which a participant or beneficiary is permitted to exercise control over assets in his or her account, in cases in which such assets do not include employer securities which are readily tradable under an established securities market.

SEC. 512. EFFECTIVE DATE OF SUBTITLE.

(a) IN GENERAL- Subject to subsection (b), the amendments made by this subtitle shall apply with respect to plan years beginning on or after January 1, 2003.

(b) DELAYED EFFECTIVE DATE FOR EXISTING HOLDINGS- In any case in which a portion of the nonforfeitable accrued benefit of a participant or beneficiary is held in the form of employer securities (as defined in section 407(d)(1) of the Employee Retirement Income Security Act of 1974) immediately before the first date of the first plan year to which the amendments made by this subtitle apply, such portion shall be taken into account only with respect to plan years beginning on or after January 1, 2004.

Subtitle C--Employee Representation

(a) IN GENERAL- Section 403(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1103(a)) is amended--

(1) by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B), respectively;

(2) by inserting ‘(1)’ after ‘(a)’; and

(3) by adding at the end the following new paragraph:

‘(2)(A) The assets of a single-employer plan which is an individual account plan and under which some or all of the assets are derived from employee contributions shall be held in trust by a joint board of trustees, which shall consist of two or more trustees representing on an equal basis the interests of the employer or employers maintaining the plan and the interests of the participants and their beneficiaries and having equal voting rights.

‘(B)(i) Except as provided in clause (ii), in any case in which the plan is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and one or more employers, the trustees representing the interests of the participants and their beneficiaries shall be designated by such employee organizations.

‘(ii) Clause (i) shall not apply with respect to a plan described in such clause if the employee organization (or all employee organizations, if more than one) referred to in such clause file with the Secretary, in such form and manner as shall be prescribed in regulations of the Secretary, a written waiver of their rights under clause (i).

‘(iii) In any case in which clause (i) does not apply with respect to a single-employer plan because the plan is not described in clause (i) or because of a waiver filed pursuant to clause (ii), the trustee or trustees representing the interests of the participants and their beneficiaries shall be selected by the plan participants in accordance with regulations of the Secretary.

‘(C) An individual shall not be treated as ineligible for selection as trustee solely because such individual is an employee of the plan sponsor, except that the employee so selected may not be a highly compensated employee (as defined in section 414(q) of the Internal Revenue Code of 1986).

‘(D) The Secretary shall provide by regulation for the appointment of a neutral individual, in accordance with the procedures under section 203(f) of the Labor Management Relations Act, 1947 (29 U.S.C. 173(f)), to

cast votes as necessary to resolve tie votes by the trustees.’.

(b) REGULATIONS- The Secretary of Labor shall prescribe the initial regulations necessary to carry out the provisions of the amendments made by this section not later than 90 days after the date of the enactment of this Act.

Subtitle D--Executive Parity

(a) PROHIBITION- It shall be unlawful for any person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security (other than an exempted security) which is registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or who is a director or an officer of the issuer of such security, directly or indirectly, to purchase (or otherwise acquire) or sell (or otherwise transfer) any equity security of any issuer (other than an exempted security), during any blackout period with respect to such equity security.

(b) REMEDY- Any profit realized by such beneficial owner, director, or officer from any purchase (or other acquisition) or sale (or other transfer) in violation of this section shall inure to and be recoverable by the issuer irrespective of any intention on the part of such beneficial owner, director, or officer in entering into the transaction. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within 60 days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than 2 years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security or security-based swap (as defined in section 206B of the Gramm-Leach-Bliley Act) involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purposes of this subsection.

(c) RULEMAKING PERMITTED- The Commission may issue rules to clarify the application of this subsection, to ensure adequate notice to all persons affected by this subsection, and to prevent evasion thereof.

(d) As used in this section:

(1) BENEFICIAL OWNER- The term ‘beneficial owner’ has the meaning provided such term in rules or regulations issued by the Commission under section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p).

(2) BLACKOUT PERIOD- The term ‘blackout period’ with respect to the equity securities of any issuer--

(A) means any period during which the ability of at least fifty percent of the participants or beneficiaries under all applicable individual account plans maintained by the issuer to purchase (or otherwise acquire) or sell (or otherwise transfer) an interest in any equity of such issuer is suspended by the issuer or a fiduciary of the plan; but

(B) does not include--

(i) a period in which the employees of an issuer may not allocate their interests in the individual account plan due to an express investment restriction--

(I) incorporated into the individual account plan; and

(II) timely disclosed to employees before joining the individual account plan or as a subsequent amendment to the plan;

(ii) any suspension described in subparagraph (A) that is imposed solely in connection with persons becoming participants or beneficiaries, or ceasing to be participants or beneficiaries, in an applicable individual account plan by reason of a corporate merger, acquisition, divestiture, or similar transaction.

(3) COMMISSION- The term ‘Commission’ means the Securities and Exchange Commission.

(4) INDIVIDUAL ACCOUNT PLAN- The term ‘individual account plan’ has the meaning provided such term in section 3(34) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002(34)).

(5) ISSUER- The term ‘issuer’ shall have the meaning set forth in section 2(a)(4) of the Securities Act of 1933 (15 U.S.C. 77b(a)(4)).

Subtitle E--Increased Accountability

SEC. 541. BONDING OR INSURANCE ADEQUATE TO PROTECT INTEREST OF PARTICIPANTS AND BENEFICIARIES.

Section 412 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1112) is amended by adding at the end the following new subsection:

‘(f) Notwithstanding the preceding provisions of this section, each fiduciary of an individual account plan shall be bonded or insured, in accordance with regulations which shall be prescribed by the Secretary, in an amount sufficient to ensure coverage by the bond or insurance of financial losses due to any failure to meet the requirements of this part.’.

SEC. 542. LIABILITY FOR BREACH OF FIDUCIARY DUTY.

(a) LIABILITY FOR PARTICIPATING IN OR CONCEALING FIDUCIARY BREACH-

(1) APPLICATION TO PARTICIPANTS AND BENEFICIARIES OF 401(k) PLANS-

(A) IN GENERAL- Part 4 of subtitle B of title I of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1101 et seq.) is amended by adding after section 409 the following new section:

‘SEC. 409A. LIABILITY FOR BREACH OF FIDUCIARY DUTY IN 401(k) PLANS.

‘(a) Any person who is a fiduciary with respect to an individual account plan that includes a qualified cash or deferred arrangement under section 401(k) of the Internal Revenue Code of 1986 who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to each participant and beneficiary of the plan any losses to such participant or beneficiary resulting from each such breach, and to restore to such participant or beneficiary any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act.

‘(b) The right of participants and beneficiaries under subsection (a) to sue for breach of fiduciary duty with respect to an individual account plan that includes a qualified cash or deferred arrangement under section 401(k) of such Code shall be in addition to all existing rights that participants and beneficiaries have under section 409, section 502, and any other provision of this title, and shall not be construed to give rise to any inference that such rights do not already exist under section 409, section 502, or any other provision of this title.

‘(c) No fiduciary shall be liable with respect to a breach of fiduciary duty under this title if such breach was committed before he or she became a fiduciary or after he or she ceased to be a fiduciary.’

(B) CONFORMING AMENDMENT- The table of contents for part 4 of subtitle B of title I of such Act is amended by inserting the following new item after the item relating to section 409:

‘Sec. 409A. Liability for breach of fiduciary duty in 401(k) plans.’

(2) INSIDER LIABILITY-

(A) IN GENERAL- Section 409 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1109) is amended by redesignating subsection (b) as subsection (c) and by inserting after subsection (a) the following new subsection:

‘(b)(1)(A) If an insider with respect to the plan sponsor of an employer individual account plan that holds employer securities that are readily tradable on an established securities market--

‘(i) knowingly participates in a breach of fiduciary responsibility to which subsection (a) applies, or

‘(ii) knowingly undertakes to conceal such a breach,

such insider shall be personally liable under this subsection for such breach in the same manner as the fiduciary who commits such breach.

‘(B) For purposes of subparagraph (A), the term ‘insider’ means, with respect to any plan sponsor of a plan to which subparagraph (A) applies--

‘(i) any officer or director with respect to the plan sponsor, or

‘(ii) any independent qualified public accountant of the plan or of the plan sponsor.

‘(3) Any relief provided under this subsection or section 409A--

‘(A) to an individual account plan shall inure to the individual accounts of the affected participants or beneficiaries, and

‘(B) to a participant or beneficiary shall be payable to the individual account plan on behalf of such participant or beneficiary unless such plan has been terminated.’

(B) CONFORMING AMENDMENT- Section 409(c) of such Act (29 U.S.C. 1109(c)), as redesignated by subparagraph (A), is amended by inserting before the period the following: ‘, unless such liability arises under subsection (b)’.

(b) MAINTENANCE OF FIDUCIARY LIABILITY- Section 404(c)(1)(B) of such Act (29 U.S.C. 1104(c)(1)(B)) is amended by inserting before the period the following: ‘, except that this subparagraph shall not be construed to exempt any fiduciary from liability for any violation of this section’.

SEC. 543. PRESERVATION OF RIGHTS OR CLAIMS.

Section 502 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1132) is amended by adding at the end the following new subsection:

‘(n)(1) The rights under this title (including the right to maintain a civil action) may not be waived, deferred, or lost pursuant to any agreement not authorized under this title with specific reference to this subsection.

‘(2) Paragraph (1) shall not apply to an agreement providing for arbitration or participation in any other nonjudicial procedure to resolve a dispute if the agreement is entered into knowingly and voluntarily by the parties

involved after the dispute has arisen or is pursuant to the terms of a collective bargaining agreement.’.

SEC. 544. OFFICE OF PENSION PARTICIPANT ADVOCACY.

(a) IN GENERAL- Title III of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 3001 et seq.) is amended by adding at the end the following:

‘Subtitle C--Pension Participant Advocacy

‘OFFICE OF PENSION PARTICIPANT ADVOCACY

‘SEC. 3051. (a) ESTABLISHMENT OF OFFICE-

‘(1) IN GENERAL- There is established in the Department of Labor an office to be known as the ‘Office of Pension Participant Advocacy’.

‘(2) PENSION PARTICIPANT ADVOCATE- The Office of Pension Participant Advocacy shall be under the supervision and direction of an official to be known as the ‘Pension Participant Advocate’ who shall--

‘(A) have demonstrated experience in the area of pension participant assistance, and

‘(B) be selected by the Secretary after consultation with pension participant advocacy organizations.

The Pension Participant Advocate shall report directly to the Secretary and shall be entitled to compensation at the same rate as the highest rate of basic pay established for the Senior Executive Service under section 5382 of title 5, United States Code.

‘(b) FUNCTIONS OF OFFICE- It shall be the function of the Office of Pension Participant Advocacy to--

‘(A) serving as a focal point for, and actively seeking out, the receipt of information with respect to the policies and activities of the Federal Government, business, and such organizations which affect such participants,

‘(B) identifying significant problems for pension plan participants and the capabilities of the Federal Government, business, and such organizations to address such problems, and

‘(C) developing proposals for changes in such policies and activities to correct such problems, and communicating such changes to the appropriate officials,

‘(2) promote the expansion of pension plan coverage and the receipt of promised benefits by increasing the awareness of the general public of the value of pension plans and by protecting the rights of pension plan participants, including--

‘(A) enlisting the cooperation of the public and private sectors in disseminating information, and

‘(B) forming private-public partnerships and other efforts to assist pension plan participants in receiving their benefits,

‘(3) advocating for the full attainment of the rights of pension plan participants, including by making pension plan sponsors and fiduciaries aware of their responsibilities,

‘(4) giving priority to the special needs of low and moderate income participants,

‘(5) developing needed information with respect to pension plans, including information on the types of existing pension plans, levels of employer and employee contributions, vesting status, accumulated benefits, benefits received, and forms of benefits, and

‘(6) pursuing claims on behalf of participants and beneficiaries and providing appropriate assistance in the resolution of disputes between participants and beneficiaries and pension plans, including assistance in obtaining settlement agreements.

‘(c) REPORTS-

‘(1) ANNUAL REPORT- Not later than December 31 of each calendar year, the Pension Participant Advocate shall report to the Committee on Education and the Workforce of the House of Representatives and the Committee on Health, Education, Labor, and Pensions of the Senate on its activities during the fiscal year ending in the calendar year. Such report shall--

‘(A) identify significant problems the Advocate has identified,

‘(B) include specific legislative and regulatory changes to address the problems, and

‘(C) identify any actions taken to correct problems identified in any previous report.

The Advocate shall submit a copy of such report to the Secretary and any other appropriate official at the same time it is submitted to the committees of Congress.

‘(2) SPECIFIC REPORTS- The Pension Participant Advocate shall report to the Secretary or any other appropriate official any time the Advocate identifies a problem which may be corrected by the Secretary or such official.

‘(3) REPORTS TO BE SUBMITTED DIRECTLY- The report required under paragraph (1) shall be provided directly to the committees of Congress without any prior review or comment than the Secretary or any other Federal officer or employee.

‘(d) SPECIFIC POWERS-

‘(1) RECEIPT OF INFORMATION- Subject to such confidentiality requirements as may be appropriate, the Secretary and other Federal officials shall, upon request, provide such information (including plan documents) as may be necessary to enable the Pension Participant Advocate to carry out the Advocate’s responsibilities under this section.

‘(2) APPEARANCES- The Pension Participant Advocate may represent the views and interests of pension plan participants before any Federal agency, including, upon request of a participant, in any proceeding involving the participant.

‘(3) CONTRACTING AUTHORITY- In carrying out responsibilities under subsection (b)(5), the Pension Participant Advocate may, in addition to any other authority provided by law--

‘(A) contract with any person to acquire statistical information with respect to pension plan participants, and

‘(B) conduct direct surveys of pension plan participants.’

(b) CONFORMING AMENDMENT- The table of contents for title III of such Act is amended by adding at the end the following:

‘Subtitle C--Pension Participant Advocacy

‘3051. Office of Pension Participant Advocacy.’.

(c) EFFECTIVE DATE- The amendment made by this section shall take effect on January 1, 2003.

SEC. 545. ADDITIONAL CRIMINAL PENALTIES.

Section 501 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1131) is amended--

(1) by inserting ‘(a)’ after ‘SEC. 501.’;

(2) by striking ‘$5,000’ and inserting ‘$50,000’ and by striking ‘$100,000’ and inserting ‘$500,000’;

(2) by adding at the end the following new subsection:

‘(b) Any person described in subsection (a) of section 532 of the Investors’ and Employees’ Bill of Rights Act of 2002 who willfully violates such section or section 104(d) or causes an individual account plan to fail to meet the requirements of section 409A of the Internal Revenue Code of 1986 shall upon conviction be fined not more than $500,000 or imprisoned not more than one year, or both.’.

(a) STUDY- As soon as practicable after the date of the enactment of this Act, the Pension Benefit Guaranty Corporation shall contract to carry out a study relating to the establishment of an insurance system for individual account plans. In conducting such study, the Corporation shall consider--

(1) the feasibility and impact of such a system, and

(2) options for developing such a system.

(b) REPORT- Not later than 3 years after the date of the enactment of this Act, the Corporation shall report the results of its study, together with any recommendations for legislative changes, to the Committee on Education and the Workforce and the Committee on Ways and Means of the House of Representatives and the Committee on Health, Education, Labor, and Pensions and the Committee on Finance of the Senate.

Subtitle F--Investment Advice for Participants and Beneficiaries

SEC. 551. INDEPENDENT INVESTMENT ADVICE.

(a) IN GENERAL- Section 404(c)(1) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104(c)(1)) (as amended by section 542(b) of this Act) is amended further--

(1) by redesignating subparagraphs (A) and (B) as clauses (i) and (ii), respectively, and by inserting ‘(A)’ after ‘(c)(1)’; and

(2) by adding at the end the following new subparagraphs:

‘(B)(i) In the case of a pension plan described in subparagraph (A) which provides investment in employer securities as at least one option for investment of plan assets at the direction of the participant or beneficiary, such plan shall make available to the participant or beneficiary the services of a qualified fiduciary adviser for purposes of providing investment advice described in section 3(21)(A)(ii) regarding investment in such securities.

‘(ii) No person who is otherwise a fiduciary shall be liable by reason of any investment advice provided by a qualified fiduciary adviser pursuant to a request under clause (i) if--

‘(I) the plan provides for selection and monitoring of such adviser in a prudent and effective manner, and

‘(II) such adviser is a named fiduciary under the plan in connection with the provision of such advice.

‘(iii) Subparagraph (A)(ii) shall not apply with respect to a fiduciary of a plan in connection with the exercise of control by a participant or beneficiary over the assets in his account if--

‘(I) such exercise of control is undertaken pursuant to investment advice described in section 3(21)(A)(ii) provided by such fiduciary, or

‘(II) at the time of such exercise of control, the plan fails to meet the requirements of clause (i).

‘(C) For purposes of subparagraph (B)--

‘(i) The term ‘qualified fiduciary adviser’ means, with respect to a plan, a person who--

‘(I) is a fiduciary of the plan by reason of the provision of qualified investment advice by such person to a participant or beneficiary,

‘(II) has no material interest in, and no material affiliation or contractual relationship with any third party having a material interest in, the security or other property with respect to which the person is providing the advice,

‘(III) meets the qualifications of clause (ii), and

‘(IV) meets the additional requirements of clause (iii).

‘(ii) A person meets the qualifications of this subparagraph if such person--

‘(I) is registered as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.),

‘(II) if not registered as an investment adviser under such Act by reason of section 203A(a)(1) of such Act (15 U.S.C. 80b-3a(a)(1)), is registered under the laws of the State in which the fiduciary maintains its principal office and place of business, and, at the time the fiduciary last filed the registration form most recently filed by the fiduciary with such State in order to maintain the fiduciary’s registration under the laws of such State, also filed a copy of such form with the Secretary,

‘(III) is registered as a broker or dealer under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.),

‘(IV) is a bank or similar financial institution referred to in section 408(b)(4),

‘(V) is an insurance company qualified to do business under the laws of a State, or

‘(VI) is any other comparable entity which satisfies such criteria as the Secretary determines appropriate.

‘(iii) A person meets the additional requirements of this clause if every individual who is employed (or otherwise compensated) by such person and whose scope of duties includes the provision of qualified investment advice on behalf of such person to any participant or beneficiary is--

‘(I) a registered representative of such person,

‘(II) an individual described in subclause (I), (II), or (III) of clause (i), or

‘(III) such other comparable qualified individual as may be designated in regulations of the Secretary.’.

(b) EFFECTIVE DATE- The amendments made by this section shall apply with respect to investment advice provided in plan years beginning on or after January 1, 2003.

SEC. 552. TAX TREATMENT OF QUALIFIED RETIREMENT PLANNING SERVICES.

(a) IN GENERAL- Subsection (m) of section 132 of the Internal Revenue Code of 1986 (defining qualified retirement services) is amended by adding at the end the following new paragraph:

‘(4) NO CONSTRUCTIVE RECEIPT- No amount shall be included in the gross income of any employee solely because the employee may choose between any qualified retirement planning services provided by a qualified investment advisor and compensation which would otherwise be includible in the gross income of such employee. The preceding sentence shall apply to highly compensated employees only if the choice described in such sentence is available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.’.

(b) CONFORMING AMENDMENTS-

(1) Section 403(b)(3)(B) of such Code is amended by inserting ‘132(m)(4),’ after ‘132(f)(4),’.

(2) Section 414(s)(2) of such Code is amended by inserting ‘132(m)(4),’ after ‘132(f)(4),’.

(3) Section 415(c)(3)(D)(ii) of such Code is amended by inserting ‘132(m)(4),’ after ‘132(f)(4),’.

(c) EFFECTIVE DATE- The amendment made by this section shall apply to taxable years beginning after December 31, 2002.

Subtitle G--General Provisions

SEC. 561. GENERAL EFFECTIVE DATE OF TITLE.

(a) IN GENERAL- Except as otherwise provided in this title, the amendments made by this title shall apply with respect to plan years beginning on or after January 1, 2003.

(b) SPECIAL RULE FOR COLLECTIVELY BARGAINED PLANS- In the case of a plan maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified on or before the date of the enactment of this Act, subsection (a) shall be applied to benefits pursuant to, and individuals covered by, any such agreement by substituting for ‘January 1, 2003’ the date of the commencement of the first plan year beginning on or after the earlier of--

(1) the later of--

(A) January 1, 2004, or

(B) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after the date of the enactment of this Act), or

(2) January 1, 2005.

SEC. 562. PLAN AMENDMENTS.

If any amendment made by this title requires an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after the effective date specified in section 561 of this Act, if--

(1) during the period after such amendment made by this title takes effect and before such first plan year, the plan is operated in accordance with the requirements of such amendment made by this title, and

(2) such plan amendment applies retroactively to the period after such amendment made by this title takes effect and before such first plan year.